Samsung has room to rise 40% even with profit miss, analysts say

[SEOUL] At least 10 analysts reaffirmed their "buy" recommendations on Samsung Electronics Co after its fourth- quarter earnings miss, estimating that the world's largest smartphone maker could climb more than 40 per cent in the coming year.

After three consecutive years of declines, shares of the South Korean company could rise during the coming 12 months to 1.62 million won - the average target price of 38 analysts surveyed by Bloomberg. That's partly contingent on Samsung's abilities to tap its twin cash-cows of memory chips and displays, and avoid the temptation to claw back market share in a globally depressed smartphone market.

The consumer-electronics giant, which is steadily losing ground to Apple Inc and mid-market Chinese brands Huawei Technologies Co and Xiaomi Corp, last week posted fourth- quarter profit that missed analysts' estimates as smartphone demand waned. Yet the profit was the company's second straight, prompting analysts at brokerages including Daishin Securities and Hyundai Securities to reiterate buy ratings.

"Samsung's smartphone market share loss may slow down as they restructured their lineup with more competitive low- to mid-end models," said Dohoon Lee, an analyst with CIMB Securities Korea. "The valuation of the stock is still cheap, so it's unlikely to fall much further from the current level."

To be sure, Korean analysts have traditionally been bullish on the country's biggest corporation. While Samsung is valued at about 8 times last year's earnings, lagging Apple's 10.5, it surpasses the 6.7 average of industry peers, according to data compiled by Bloomberg.

And the company remains heavily exposed to the smartphone market, its largest source of revenue, as a vendor and supplier of components. Samsung's phone shipments were headed for their second straight annual decline as markets mature and China's economy slows. Apple, which garners most of the industry's profits, ended Thursday below $100 for the first time in over a year after investment brokerages from UBS AG to Morgan Stanley lowered forecasts on iPhone shipments.

Samsung didn't break out the performance of individual divisions when it reported earnings on Jan. 8. That will come during fully audited earnings later this month. However, semiconductors were again expected to have contributed the most to profit, while smartphones lagged in terms of growth.

The results came days after Co-Chief Executive Officer Kwon Oh Hyun warned of escalating competition and urged employees to find ways to safeguard the company's leads in smartphones, TVs and memory chips now that software and platforms are eclipsing hardware. Samsung lost more than US$8 billion in market value last year.

"If they know what reality is, they would not focus on the mobile-phone business," said Yoo Eui Hyung, an analyst at Dongbu Securities. "Memory chips or displays could show better performance than market estimates."

Longer term, the company has signaled a potential shift in its smartphone strategy. Vice Chairman Lee Jae Yong, heir- apparent to South Korea's biggest conglomerate, last year replaced the head of the mobile-device business as part of an annual management overhaul, suggesting a renewed focus on software innovations. The new leader, Koh Dong Jin, worked on Samsung's new payments service and its Knox security software.

The company is slowing its market-share losses through popular mid-priced phones such as the "A" series, CIMB's Lee said. Yet apart from beefing up services such as payments, Samsung will need to wow consumers with revolutionary advancements to revive its brand, analysts said.

"They should take a different direction in the mobile-phone business, such as reducing costs or developing a brand-new, state-of-the-art technology," said Greg Roh, an analyst at HMC Investment Securities. "One example is releasing a foldable smartphone. They should show that kind of innovative technology."

BLOOMBERG