(Source: Gizmag)
Stock is battered ahead of Tuesday's earnings report

Samsung Electronics Comp., Ltd. (KRX:005930) is one of the world's most coveted brands.  It sells more smartphones than any other company, globally.  It produces more computer memory chips (NAND, DRAM) than any other manufacturer.  And it still is the top LCD TV seller.

But being king of many a market, Samsung finds itself more under the investor microscope than ever.  As South Korea's markets opened Friday morning shares of Samsung's public stock continued their slide, hitting
>W1.290M (Korean Won) (~$1,222 USD), the lowest level since August 2013.

I. The Boom

From mid 2011 to June 2013, Samsung was on a rip.  With steady gains to both unit shipments and earnings margins, Samsung positioned itself as the most profitable and ubiquitous Android phonemaker, rivalling America's Apple, Inc. (AAPL).  Shares more than doubled from round W680K/share (~$644 USD) in mid-2011 to W1.584M (~$1,500 USD) earlier this year.

But much like Apple, Samsung has been facing concerns of a slowing high end smartphone market.  Apple largely escaped unscathed, with shares actually climbing more than a quarter from their mid-2013 lows.

For Samsung it's been a bumpier ride -- after hitting a recent low of W1.209M (~$1,150 USD) earlier last August, it climbed to W1.500M (~$1,420 USD) over Q3 2013, before fear once more began to influence trading.

Analysts feared a Q3 meltdown.  Instead Samsung Electronics left analysts confused and conflicted.  While it outperformed expectations, shipping 89 million smartphones (including 18 million Galaxy S4s) and earning an operating profit of W6.28T ($6.3B USD) on sales of W35.2T ($33.1B USD), it also warned of a potentially slow (calendar) Q4 2013 and Q1 2014.

Shares have been sliding since the start of December, but after a negative guidance from a top guidance source, selling really picked up pace on Thursday and Friday.

II. Gloomy Outlook

The bad news came via a Q4 earnings prediction from Starmine SmartEstimate, whose earnings predictions are widely considered an industry gold standard.  FMR -- controlled by multi-billionaire Edward C. “Ned” Johnson III -- is the parent of Fidelity Investments and Fidelity National Financial Inc. (FNF) (a mortgage lender).  Fidelity Investments' "Emerging Markets" mid-to-high risk growth fund is a large shareholder in Samsung Electronics.  Starmine is a research venture of Fidelity Investments and news service Thomson Reuters.

Starmine weights analyst estimates based on their performance history, a key to its accuracy.  In a report to its clients this week it predicted Samsung to earn W9.9T ($9.385B USD), a 3.6 percent quarter-on-quarter drop from Q3's operating profit of W10.16T ($9.63B USD).

Samsung Galaxy S4

Overall analysts aren't quite that pessimistic, if you take an unweighted average.  An unweight average of 40 top analysts from Thomson Reuters I/B/E/S expects a profit of W10.3T (~$9.76B USD) -- a record.  But there's cause to believe that Starmine's numbers might be closer to the mark. 

Perhaps tellingly some of the most pessimistic analyses are actually coming from Samsung's home nation; Industrial Bank of Korea (KRX:024110) analyst Lee Seung-Woo gave a gloomy comment to Reuters, remarking:

We expect Samsung's performance to be about 9.5 trillion won, lower than the market consensus of around 10.2 trillion won. The biggest reason would be the won-dollar exchange rate, followed by shrinking margins in organic light-emitting diode (OLED) sale.

An even harsher estimate comes courtesy of BNP Parabas SA (EPA:BNP) whose analyst Peter Yu is predicting a severe 14 percent drop in profit to W8.8T ($8.34B USD).

III. Strong Won Breeds Problems

Aside from a potential lucrative payout to Apple regarding smartphone patent litigation, increasing pressure on smartphone component sales, bonuses owed to top executives, and slower than hoped sales in the pricey fledgling OLED TV display segment, perhaps Samsung's biggest problem is one its fellows Korean companies are facing as well -- a strong Won.  In early 2009 a U.S. dollar would get you W1,500.  Today it will get you about W1,050.

Korean Won
The Won has soared in strength, but that has led to headaches for top local corporations.
[Image Source: Bloomberg]

The strengthening won leads to a glass-half-full, glass-half-empty sort of scenario.  On the glass half full side, the over 5 percent rise in the value of the Won means that in USD, the hit to Samsung's market cap since the December slump is only 15 percent, versus 18.5 percent if you don't factor in inflation.

On the flip side, the strong Won is causing real problem for Samsung's domestic efforts in South Korea, as it makes it difficult to bring money back into the country.  In Q4 the average inflation rate fell to 0.8 percent, down from 1.23 in Q3. 

U.S. v. South Korea inflation

By contrast the U.S. mustered 1.23 percent, just a cut below the EU average of 1.3.  Japan also suffered from weak inflation in late 2012 earlier this year, but it is expected to fare much better in Q4.  In Japan inflation climbed to above 1.2 percent in Q4, over halfway to the target (2 percent) set by the Bank of Japan (TYO:8301).

IV. iPhone 5S Surges Ahead of Galaxy S4 in the U.S.

In terms of smartphones, Samsung had a tough slog ahead for Q4 no matter how you cut it.  Samsung's Galaxy Note 3 was impressive but did not appear to give Samsung the firepower it needed to counter Apple's Sept. 20 launch of the colorful iPhone 5C -- a mid-range handset -- and the high end flagship model, the iPhone 5S.

In U.S. sales Apple is expected to emerge the clear winner in Q4 U.S. sales, having held the #1 spot (with the iPhone 5S) and either the #2 or the #3 spot (with the iPhone 5C) on every major U.S. carrier, according to Canaccord Genuity analyst T. Michael summary of sales channel surveys. 

iPhone 5S

The remaining spot was taken by the Samsung S4, which remains a steady seller, if a bit under the 10 million units per month Samsung was hoping for.  The Galaxy Note 3, however, hasn't seen very strong sales as buyers appear a bit hesitant in jumping at the 5.7-inch screen.  Sales of the Note 3 are expected to be around 5-6 million units.

Samsung is trying to remain patient with regards to its "Galaxy Gear" project -- the companion smartwatch to the note.  It's believed to have moved about 1 million units.  While that's rather phenomenal in a way, given how overpriced and underfeatured the device is, on the flip side Samsung may have spent as much advertising the new product as it made off the profit margins.

Galaxy Note 3

However, regardless of its earnings for the quarter there's little doubt that Samsung will be far and away the most profitable Android OEM.  And it continues to pursue a diverse long term strategy, spending deeply on research into next generation technologies, and strengthening its patent presence in America and the European Union.

All eyes will be on Samsung when it reports its earnings on Tuesday Jan. 7.  Apple will announce its earnings two weeks later on Tuesday, Jan. 21.

Source: Reuters

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