Sharp Poised for Turnaround? Not a Single Analyst Thinks So

(Bloomberg) -- Sharp Corp.'s shares have more than doubled since new parent Foxconn Technology Group took control, yet analysts tracking the Japanese maker of flat-panel displays aren't convinced the business is turning around.

The stock hit a one-year high Monday, giving Sharp a market value of about 902 billion yen ($8.6 billion) following the August completion of the Foxconn merger and capital injection. Even so, nine out of 11 analysts surveyed by Bloomberg recommend selling shares in the Osaka-based company -- a ratio that has hardly budged since before the rally began, according to data compiled by Bloomberg. There are no buy ratings.

Foxconn's 289 billion yen rescue package brought Sharp back from the brink of bankruptcy. Now the Japanese company needs to prove it can slash costs, revamp its liquid-crystal display business and end the losing streak that saw it book 1.4 trillion yen in losses over the past five years. Tai Jeng Wu, who took over as Sharp's president in August, is delivering his first earnings report in Tokyo on Tuesday. The company has yet to announce a business plan under new management and hasn't given full-year forecasts.

“We will need to see real proof that fundamentals are improving first,” Masahiko Ishino, an analyst at Tokai Tokyo Securities, who recommends holding the shares. “Then we'll need to know what the strategy is.”

Yoshifumi Seki, a spokesman for Sharp, declined to comment on market moves. The company's shares fell as much as 3.3 percent in Tokyo trading Tuesday.

Sharp is in talks with Apple Inc. to supply organic LED displays for the iPhone maker's next generation of smartphones, a person familiar with the matter has said. Adding to the optimism is the fact that Foxconn is the main assembler of Apple's devices.

Sharp last month said it anticipates full-year operating profit and net income to “improve drastically” due to efforts to restore profitability and synergies related to its merger with Foxconn, but didn't issue any specific figures. Operating income may reach 40 billion yen, the Nikkei reported Oct. 19, without citing anyone, a threshold that's more than triple the 12.9 billion yen average of analysts' estimates.

Apart from a new outlook, investors and analysts will be looking to see whether Sharp's new president will detail plans for working more closely with Foxconn. Joining the world's largest contract manufacturer will also let Sharp invest in and “actively develop” new technologies in areas including communication, the Internet of Things, display, smart homes, solar energy and business solutions, the company said at the time of the deal.

“It's too early to see an impact from Foxconn on Sharp's operations,” said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo who stopped rating Sharp in February. “If there are any improvements in quarterly profits, it would be largely due to policies Sharp put in motion before the acquisition.”

While Sharp may report its first annual operating profit in three years, it will probably remain in the red on the net income basis. Analysts forecast an annual net loss of 36.2 billion yen for the year ending March 2017. Thanks to Foxconn's investments, Sharp's liabilities no longer exceed assets, allowing the company to focus on improving its core business.

Sharp shares are overvalued, Masahiro Wakasugi, an analyst at BNP Paribas SA, wrote in a report on Oct. 19. Wakasugi, who has a 96 yen price target on the stock and a sell rating, said the rally may be short-lived as LCD panel prices start to fall in November, when seasonal demand declines. Sharp shares rose 5.2 percent to 181 yen at the close in Tokyo Monday.

The Japanese company has bet big on large-size screens, investing 1 trillion yen to build factories in Kameyama and Sakai. As liquid-crystal display prices fell and the currency rose to a post-World War II high, Sharp shifted attention to smaller sizes for high-end smartphones and tablets.

Sharp in July reported its seventh-straight quarter of losses as sales of TVs and panels for smartphones and tablets plunged 38 percent in the three months ended June 30. The slump in demand from handset makers has also hit the company's domestic rival Japan Display Inc., which reported a loss in the period ended June 30.

Unlike Japan Display, Sharp also has to contend with money-losing solar panel operations and shrinking revenues from its consumer electronics business. The answer may be more painful restructuring for a company emerging from a takeover battle that spanned four years. Just two months after Sharp signed the deal, Foxconn's Chairman Terry Gou warned that job cuts may be unavoidable.

A close review of the display maker's operations highlighted a “level of inefficiency throughout Sharp,” and therefore a “very regrettable need” to reduce the workforce, Gou said in a letter to staff in May. Sharp followed with a filing to the Tokyo Stock Exchange saying it would eliminate 7,000 jobs; it later retracted that document and made an amended filing without that number.

“First, Sharp needs to win back the trust of their customers,” Tokai Tokyo's Ishino said. “The orders from Foxconn will come later.”

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net. To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Reed Stevenson, Peter Elstrom