It will not have gone unnoticed that the world of mobile phones has changed significantly in a short time. The smartphone is now an established word, and tablets became the next big thing when Apple (AAPL) introduced the first iPad. The two largest and most successful makers of these products at this time are Apple Inc. and Samsung Electronics Co. Ltd (GM:SSNLF).
Next to U.S. Pink Sheets, Samsung is also listed on the London market under symbol SMSN. Trading SMSN is clearly the preferable option over SSNLF.PK for U.S. investors. Most of the European investors will likely choose to trade Samsung in Euro through the German Xetra market. Samsung itself publishes financial reports in Korean Won, and also converts to a U.S. dollar balance sheet and P&L. You will find no publications whatsoever in euros. Analysts' appraisals are also available in Won and dollars only.
Samsung is currently leading over Apple in global smartphone sales, becoming China's largest mobile phone supplier in 2012. This lead is expected to extend slightly in 2013 because of Samsung's larger multi-tier product portfolio. You will begin to understand why no self-respecting asset manager should only focus on Cupertino-based Apple and would fail to look at Apple's biggest global competitor. Especially since, based on the recent technical picture, Samsung Electronics would appear to be the better option.
Samsung Electronics has grown into a major equipment manufacturer, operating in the field of display electronics, digital consumer electronics, mobile telephony, information technology, telecommunication, digital imaging technology, storage technology, and components for electronic devices and LED technology. Samsung portrays itself in advertisements as your future supplier for everything electronically-controlled in your household. In 2011, group turnover exceeded $143 billion and net profit was more than $11.9 billion, over 8% of sales compared with 10% for a consumer products giant such as Unilever (UL) (UN).
Samsung has grown strongly in 2011 and 2012 after introduction of the Samsung Galaxy phones (S, S Advance, S2, S3, plus the Note I and II) and Samsung tablets surpassing Apple in the process. Samsung is not very forthcoming with information about the exact distribution of the turnover among its business units. The company is arguably still lagging in reporting transparency compared to financial reporting in the West.
But Samsung of course recognizes that the growth of the past two years was largely attributable to its market share in the smartphone and tablet market. Samsung's product dependent growth is clearly visible in Return on Equity over the last decade:
This set shows rather large variations. For 2012 and 2013, figures are again in the 20%+ range, but it does show the issue when dealing with technology-driven companies. These types of companies have the problem that they will always have to reinvent the wheel, which requires significant R&D and staying in touch with consumer demand at all times. Simply look once at the recent history of companies such as Philips (PHG), Sony (SNE), Nokia (NOK), and Research In Motion (RIMM) to see how quickly you can go from boom to bust.
Successful technical (re)invention means consumers will rush back to your products to take part in the next hype, hopefully replacing revenue and profit from older technology with that of newer products. But that doesn't always completely hold true, clearly reflected in earnings and dividend throughout the years.
Samsung's earnings per share and Dividend over the last decade:
Samsung keeps virtually all the profit it makes within the company. Usually less than 5% of total profit is distributed as dividend. That in itself is not bad, as in the case of Samsung, the company clearly sees plenty of room for new investments. The risk always remains if all these new investments will actually prove successful, but for now, we still see Net Asset Value of Samsung shares ($563,27 at the end of 2011) showing an annual increase of around 20% (after deduction of the dividend). No mean feat.
2012 EPS is hovering around $150 per share and 2013 projections are for $183 per share. Analysts expect further growth of 20% the following year. Truth be told, this level of growth rate may be unsustainable in the long run. Samsung's history does show it does not occur very often.
Samsung produces many of its products in South Korea, making sales in South Korea look great. But when you take away so-called 'inter-company' deliveries from the figures, it appears Samsung is about as large in the U.S. as it is in Europe, in China, and in the rest of the world. This has been the case since 2010, making this company a true global player.
Shareholder equity per share was $563,27 in 2011 and the current price is $1.350. If the price would fail to rise further from here, it would take approximately 5.5 years at this growth rate for book value to reach the same level as the current share price. This is relatively short. To compare again with a company like Unilever, in another industry entirely but with a similar global footprint, that company is expected to take 22 years to do the same. It should however be said that Samsung's present dividend yield is lower than of Unilever and many others.
To quickly check if the company is expensive or not, we can easily review and compare Samsung's P/E ratio. The average P/E for the last 5 years since 2006 was 10.6, thus trading considerably cheaper than other companies like SAP (SAP), which stands at 21.6.
The P/E based on estimated 2012 profit comes to 9.0. Based on the historical and projected growth of the company, Samsung Electronics certainly doesn't seem inexpensive and there is even room for disappointment in future growth rates.
There are always risks with any investment. With Samsung you have a political risk. Most of Samsung's production sites, part of huge so-called Samsung 'villages,' are located in South Korea. If South Korea, which formally is still at war with North Korea, would be attacked by the latter country, these sites are vulnerable as they are an easy target.
Samsung originally started as a family business. The three children are now fighting over the stage roles. One of the brothers, and now a major shareholder, is chairman Lee Kun-hee, a controversial figure in South Korea. One of his sons, Jay Y. Lee (43), is the Chief Operating Officer. It's generally assumed Jay Y. Lee is being groomed to take the helm in the coming years, as he is already seen as the main figure responsible for Samsung's current success in both smartphones and tablets. Reportedly a technical genius, he seems in tune like no other with consumer wants and needs in the field of consumer electronics. Another positive is his relatively young age compared to most Korean executives, but family battles for control can always get out of hand, so it will be interesting to see how this progresses.
The company has a whole series of legal proceedings continuing all over the globe, especially between itself and Apple. Both companies continue to accuse each other of infringement on key patents. This can potentially become very expensive for Samsung, but for the moment it's mostly costly in terms of publicity. If Apple's complaints were entirely true, then Samsung could be seen as an excellent copier, but not a great inventor. It would raise questions about Samsung's own innovative strength. But if we compare Apple's recently released 4-inch iPhone 5, which has received mixed responses from industry experts and consumers for lacking in revolutionary features, with Samsung's new 5.5-inch Galaxy Note II, with an improved S-pen and many new features, it seems there is little doubt about Samsung innovative strength. The new 5-inch Galaxy S4 will be released next month.
Despite an increasingly contentious relationship, Samsung remains a major components supplier to Apple. It was recently reported that Apple could begin migrating its app processor manufacturing from Samsung to TSMC (TSM) sooner rather than later. Taiwanese financial media have reported that TSMC has been contracted to make Apple's A6X processor, which goes into the 4th-generation iPad, with trial production beginning in Q1. If accurate, there's a good chance the next-generation iPhone and iPad will also rely on TSMC-built processors.
From a technical perspective, Samsung shares are still the better option over Apple. AAPL, until very recently, was in a clear reversal pattern, and if the price of Apple does end up dropping below $500, it definitely seems the uptrend is finished for the time being, despite solid fundamentals, and could see Apple tumble a little while longer. The markets can hardly be called rational by any means. For Samsung, the technical picture looks outstanding and the price will continue to trend upwards unabated for some time to come.
Due to the innovative businesses it's in, Samsung is always vulnerable to some extent, and future results of consumer electronics will always remain somewhat volatile, but whichever way you look at it, fundamentally or technically, shares of Samsung Electronics certainly remain worth buying for the short and medium term, continuing to provide a nice return over the next few years.