Sparks of Hope for Consumer Electronics

GOOD MORNING. Stocks in Asia closed higher today; U.S. futures are point to a lower open.

Electronics firms have been hard hit by the slowdown in consumer spending, and the strong yen has only made things tougher for Japanese exporters. But while Americans may not be splurging for giant flat-screen TVs just yet, things may be starting to turn around in the sector, as the latest results from Sony (SNE) and Samsung Electronics suggest.

Though Sony’s revenues dropped 20% from a year ago, it posted a smaller quarterly loss than analysts had expected, suggesting that the sector may finally be turning around The firm said it lost 26.3 billion yen ($292 million) in its fiscal second quarter, which ended in September, beating forecasts for a 40.4 billion yen loss. Sales and operating revenue for the quarter fell to 1.66 trillion yen from 2.07 trillion yen a year earlier—and sales dropped by over 30% in its consumer electronics division as products like Bravia LCD TVs and CyberShot cameras faced stiff price competition. Still, Sony returned to operating profit in the consumer electronics business and hiked its forecast for operating profits for its full fiscal year. The company said it now expects a net loss of 95 billion yen for the fiscal year ending in March 2010, ahead of its previous forecast for a loss of 120 billion yen.

While Sony lost money, its big rival Samsung posted record profits. The Korean company, which makes everything from flash memory chips to flat-screen TVs, reported that profits in its July-September period rose to 3.72 trillion won ($3.14 billion), beating forecasts of 3.34 trillion won and topping its own record quarterly profit of 3.14 trillion won in the first quarter of 2004. Samsung also raised its forecast for 2010, though it cautioned that fourth quarter profits would likely be lower due to a rise in the Korean won against the dollar.

As for the stocks, shares of both companies have risen sharply in recent months, with Sony up 39% this year and hitting a 52-week high in New York yesterday. Analysts expect traders to take some profits off the table, and Sony itself is lowering expectations. Chief financial officer Nobuyuki Oneda told reporters today that Sony is being “cautious” in forecasting end-of-year sales and that the company “cannot be too optimistic” because prices are eroding.

IN OTHER NEWS:

Consumers are feeling less confident – but what about the industries that serve them? The Chicago Purchasing Managers Index, due out at 9:45 this morning, will give investors a sense of whether, and how quickly, regional businesses are expanding. The index hit a neutral 50 in August but slid back down to 46.1 in September, indicating contraction. In addition to the overall index, the new orders index was also negative in September, leading analysts to expect another negative reading for October – a slightly improved 48.5.

Chicago’s results are heavily influenced by the auto industry, so August’s neutral reading was likely a fleeting “cash for clunkers” bump, says David Wyss, chief economist at Standard & Poor’s. Reports from other, more diversified, regions of the country have been more positive than Chicago’s, says John Canally, an economist with LPL Financial.

While GDP rose a better-than-expected 3.5% in the third quarter, the manufacturing sector is growing more slowly than other parts of the economy. In today’s report from Chicago, and the national Institute for Supply Management’s similar report on Monday, investors will look to the employment index for any signs that manufacturing employment is at least improving if not expanding.

With these October reports, the market will start shifting focus from the third quarter to the fourth, looking for signs of sustainable growth not tied to government stimulus, Canally says. The market seems to be “primed for disappointment,” with little tolerance for bad news, he says. Investors will find out this morning – and Monday – if business conditions are strengthening enough to keep the market happy.