Is Sony Destined For Junk Status?

Sony Corporation SNE had its credit rating lowered by Standard & Poor's on Wednesday, with the credit rating agency citing Sony's weak profit outlook. The credit rating agency lowered Sony's rating one notch from A- down to BBB+, with a negative outlook. Sony, which was once one of the world's most respected companies, is now flirting with junk status. Just last week Sony warned that it was likely to report bigger losses than it had previously forecast. Sony has struggled to turn around its unprofitable television business because competition in the sector is strong and profit margins are weak. The company has also had to deal with production problems stemming from a number of natural disasters, including last year's earthquake and tsunami in Japan and the floods in Thailand. The company's bottom line has also been hurt by a strong yen that has reduced Sony's profit margins. Although Japan's Finance Ministry said on Tuesday that it had conducted stealth currency interventions last year to cool the rising yen and might do so again in the future, there's no guarantee that such an intervention would bring the yen down far enough to significantly benefit Sony's bottom line. The move by Standard & Poor's is just the latest downgrade that Sony has received from the major credit rating agencies, with both Moody's Investors Service and Fitch Ratings downgrading Sony recently. With no good news on the horizon, it's possible that Sony's losses could grow and the company's credit rating could eventually fall to junk status. Although stock markets across Asia were higher on Wednesday, Sony's stock was down 0.10, or -0.51%, to $19.68 during pre-market trading on the New York Stock Exchange.
ACTION ITEMS:

Bullish:
Traders who believe that Sony will turn things around might want to consider the following trades:
  • The obvious choice would be to buy shares in Sony (SNE) but investors who feel that Sony's woes reflect the greater problems facing Japan might want to buy an ETF like the iShares MSCI Japan Index Fund EWJ if they think Japanese companies like Sony can turn things around.
Bearish:
Traders who believe that Sony faces too many obstacle may consider an alternative position:
  • One of the biggest problems Sony faces is the strong yen. If there is more bad news out of Europe, the yen could move higher and Sony's losses would widen. The CurrencyShares Japanese Yen FXY is an ETF that could also move higher in such a scenario.
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