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Recently, Samsung Electronics (OTC:SSNLF) has been in the news with many new products being released. It is coming off very strong previous financial results and its products are in high demand. It has many distribution channels both at the consumer and business-to-business levels. With Samsung's heavy presence in third-party electronics, you would be hard pressed not to find Samsung components. Looking at Samsung as a buying opportunity requires us to look at where the company is today.

Innovation

Samsung has been innovating aggressively, and while some may argue that it lost some market share to other companies such as LG Electronics (NYSE:LPL), it is far from becoming mid tier.

Samsung Galaxy S4

The Galaxy S3 has been an overwhelming success for Samsung with a 10.4% market share in Q3 2012. This has laid the ground work for the recently launched Galaxy S4 and it will be available worldwide shortly. Some of the features are just a natural progression of the hardware, but some features are innovative. The new S4 will support air hand gestures that allows navigation of the S4, recognized by the camera. Eye tracking software also adds to the experience by readjusting the display according to what you are looking at. While these features can be debated as useful or not, the point is that Samsung is still pushing the envelope of technology.

Additionally, Samsung has pushed forward into the mobile enterprise market with the SAFE program (Samsung for Enterprise). This program utilizes the security feature called Knox and is directly positioned to compete with BlackBerry's (NASDAQ:BBRY) enterprise products. A previous article has more details on these features.

OLED

Organic LED is an area that is growing substantially. Oh-Hyun Kwon Vice Chairman & CEO of Samsung stated "the OLED Business achieved significant growth and improved profitability by reinforcing differentiated competitive advantage."

Samsung Electronics is one of the major suppliers of LED screen technology and is continuously innovating in this area. The quality and pixel density has increased substantially, while the price per unit has become very competitive.

Smart Watch

Samsung has been developing its version of the smart watch and this innovation is another example of its desire to stay on the leading edge. Another Seeking Alpha contributor, George Kesarios, has written an article specifically about the Smart Watch. It is a good read.

Televisions

It is no surprise that Samsung's smart TV's are very popular. The integration of software via TV apps makes the television viewing process more interactive. The innovation did not stop there as Samsung just released a new version of the smart TV. The new TV includes the smart hub, which makes the TV a central device in your living room. It integrates your other mobile devices for a better experience. The evolution kit is also new, where it allows a module to be replaced that upgrades the software and processor components of the TV. This prevents the need for a complete upgrade to a new TV to gain features.

Recent stock price appreciation

As illustrated in the graphs below, Samsung has experienced a substantial increase in its share price over the last three years by doubling. The big question asks if this is sustainable. The significant run up has had a couple of minor corrections, but nothing that would be considered major.

(click to enlarge)

2005 - 2013 005930 on Korean Stock Exchange

(click to enlarge)

2011 - 2013 005930 on Korean Stock Exchange

Valuation

2010

2011

2012

Year-end stock price KRW

949,000

1,058,000

1,522,000

Earnings Per Share KRW

105,992

89,073

154,020

Book-value Per Share KRW

525,173

598,623

714,032

Revenue per share KRW

908,880

969,841

1,182,039

PE

8.95

11.88

9.88

Price/Book

1.81

1.77

2.13

Price/Sales

1.04

1.09

1.29

Note: currency KRW Korean Won

With a market cap of $297 billion USD, Samsung is large and is affected by the global economy as a whole. China and the United States are currently driving the world economy and any slowdown would reduce revenue. While this is unlikely in the near term, some variation should be expected. The current P/E is cheap at 10, relative to other industry competitors. While Samsung does have some debt ($13 billion USD), it is relatively small in relation to the market cap and cash on hand ($34 billion USD). With good cash flow, Samsung has positive momentum to continue with its earnings growth.

2007

2008

2009

2010

2011

2012

total payout

common

10,113

6,987

10,256

12,970

7,170

10,467

preferred

1,598

1,102

1,598

1,995

1,102

1,598

total

11,711

8,089

11,854

14,965

8,272

12,066

payout ratio

15.8%

14.6%

12.3%

9.3%

6.0%

5.1%

amount of shares purchased

common

16,453

0

0

0

0

0

preferred

1,801

0

0

0

0

0

total

18,254

0

0

0

0

0

total shareholder return

29,965

8,089

11,854

14,965

8,272

12,066

net income

74,250

55,259

96,495

161,465

137,590

238,453

total payout ratio

40.4%

14.6%

12.3%

9.3%

6.0%

5.1%

Samsung Electronics shareholder return

Currently the dividend is 0.51%, with a payout ratio of 5.1%. The surprisingly low payout ratio indicates that a substantial dividend increase is likely in the near term. But with a dividend currently of 0.51%, this is far from a dividend play.

North Korea

Of great concern recently is the geo-political issue in the region. It is very early in the posturing, yet it would be unwise not to consider the implications for Samsung. Many of its manufacturing plants are located worldwide outside of Korea and Asia, and would be immune to major disruptions. It is foreseeable that supply chain and administrative issues would force some loss of revenue for Samsung. As the uncertainty of the situation grows, the share price will likely be affected negatively. This would also be exaggerated by the recent rapid growth in share price, with investors protecting their capital.

Conclusion

The low dividend being distributed by Samsung makes this more of a growth stock for investors. With the recent rapid growth, innovation must continue to support the large revenue required by Samsung. While it is clear that Samsung is innovating new products, the number and success of the innovations required are high. With everything remaining the same, growth should continue for the near future, yet any small or perceived change would initiate a major pullback. The geo-political situation in the region would most likely be responsible for a pullback.

Samsung would make a good long-term investment, but not at these levels. Wait for a pullback of at least 10% before initiating a long position. If you are so inclined, starting a short position in the near term before finding your long entry point, might be an option.

Source: Samsung : Innovation Leads To Opportunities