With shares of Samsung now trading at around 1,310,000 won on the Korea Stock Exchange, is the company a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Last week, Samsung reported its fourth straight record quarterly profit, of $7.4 billion, as its Galaxy range of smartphones continued to sell strongly. Profit from the company’s mobile division more than doubled to 5.63 trillion won, but that represented 69 percent of the total group profit, raising some concerns about other aspects of the business. Sales of memory chips are slowing for the Korean company, with profit at the division dropping 28 percent to 1.15 trillion won.
The company has also entered new markets in Africa and Eastern Europe this week with its bestselling smartphones and tablets. It sold a total of 56.3 million smartphones in the third quarter for a global market share of 31.3 percent to Apple’s (NASDAQ:AAPL) 26.9 million iPhones. The company’s stock fell in August after the jury ruling in its patent case against Apple went the opposite way, but the Korean company has appealed the decision and the $1.05 billion worth of damages.
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“The biggest concern for Samsung is that its smartphone growth momentum will slow,” Hana Daetoo Securities analyst Nam Dae-jong told Reuters. “It’ll be difficult to maintain such a high profit margin from handsets as the market gets crowded and competition will intensify.”
H = High Quality Pipeline
Samsung is looking to make a mark with new products from its mobile division and find new clients for its display and semiconductor businesses. The Korean company, a loyal Google (NASDAQ:GOOG) Android partner for long, is beginning to branch out, building its line of new Ativ smartphones and tablets for Microsoft’s (NASDAQ:MSFT) Windows 8 operating system. While the Ativ is not arriving in the U.S. anytime soon, another Samsung Windows Phone, the Odyssey, will be available on Verizon’s (NYSE:VZ) network this December.
Samsung is also looking for new buyers for its screens and chips with rival-cum-partner Apple beginning to move to other suppliers. Most analysts are of the opinion that Samsung will not be at a great disadvantage in the area as more original equipment manufacturers work on developing newer tablets and ultrabooks.
“That key component market is getting tighter, thanks to the mobile boom,” Kiwoom Securities analyst Kim Sung-in told Reuters. “There are now lots of IT companies producing tablets and ultrabooks. This will restore the component supply imbalance, which has been extremely skewed to Apple due to its huge bargaining power.”
E = Excellent Relative Performance to Peers
Many investors favor Return on Equity as a key metric to how well the company is operating. Samsung’s operational performance is much healthier than peer company comparisons. Samsung has an ROE of 19.34 percent while Finnish rival Nokia (NYSE:NOK) comes in much lower at negative 42.89 percent and Research In Motion (NASDAQ:RIMM) has an ROE of negative 6.36 percent.
Operating margins are also critical for stock evaluation. Samsung, with a margin of 13.04 percent, betters Nokia’s negative 13.63 percent and RIM’s 0.87 percent.
T = Trends Support the Industry in which the Company Operates
Samsung’s Galaxy line of products has been of its most profitable with sales spiking over the past few quarters, and while there are some worries of saturation, the smartphone industry is widely predicted to still hold tremendous potential. According to a recent report, the total installed base for smartphones worldwide reached 1.04 billion in the third quarter, while just a year ago this number was 708 million. Samsung has a much wider reach in China compared to its current main rival Apple, but markets such as India and Africa are still waiting to be conquered. The demand for tablets, which Samsung’s builds and also supplies components for, is also set to boom. According to IDC, the global tablet market will reach 165 million units next year and 260 million units by 2016.
While investing in Samsung is often not an easy task operationally because of its trading location, the company is one that is very keenly watched because of its high-selling products and its relationship with Apple. The Korean electronic giant has been delivering healthy sales and profits over the past few quarters and looks to be in good shape to continue doing that because of the industries it does business in.
Samsung looks like it will OUTPERFORM based on the key metrics above.
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