W2 mil. per share for Samsung Electronics myth or foresight?
By Kim Da-ye
On Oct. 6, 2011, when Apple founder Steve Jobs’ death was made public here, Samsung Electronics’ shares jumped up 4.38 percent during trading hours and closed up 1.54 percent at 855,000 won.
The absence of the creative genius was believed to deal a blow to Apple’s long-term growth and be a boon to its smartphone rival, Samsung Electronics.
In the next six months, Samsung’s stock price would continue an unprecedented ascent, reaching its all-time high at 1,418,000 won on May 2.
Around late April, markets became highly optimistic about Samsung Electronics stock’s future. Analysts busily upgraded the price targets for Samsung to catch up with the rapid growth of the stock price.
Some domestic and foreign brokerage houses, including Daishin Securities, Hanwha Securities and Nomura Securities, raised it to 2 million won while Korea Investment & Securities suggested 1.95 million won and Woori Investment & Securities called 1.8 million won.
Then came the escalation of the Greek crisis after the election in the debt struck country ended inconclusive on May 6. At the simultaneous deterioration of Spanish banks’ health, European investors panicked and withdrew heavily from the Korean market.
Samsung Electronics, of which foreign investors hold some 50 percent, was hit hard. The price plummeted from 1.39 million won to 1.21 million won between May 2 and May 31 as foreigners net-sold nearly 1.4 million shares among 75 million they had owned.
It was a rude awakening for the market that had to rethink if a 2-million-won Samsung Electronics share was after all a myth.
Bulls for Samsung
The rally of Samsung Electronics’ shares between last August and April are said to have been led largely by the firm’s robust lineup of smartphones and its unique role as a maker of complete handsets and a supplier of key parts.
M.S. Hwang, a Hong-Kong based analyst at Samsung Securities, said in an interview that the handset business and the improving brand value have boosted investment sentiment for Samsung Electronics.
Hwang said that earnings forecasts for Samsung tended to be wrong in the past because its main businesses of semiconductor and display panels are highly sensitive to economic cycles. Because of Samsung’s unpredictable earnings, its shares have been discounted, he said.
“One recent change is that the less cyclical businesses such as handsets and televisions make money, and investors can trust earnings forecast more than before,” the analyst said.
“What investors like the most is being able to forecast and what they dislike the most is being uncertain about future earnings when they hold the stocks.”
Other analysts are more bullish on Samsung’s handset business. Lee Sei-cheol, an analyst at Meritz Securities who upgraded the price target from 1.7 million won to 2 million won on May 15, says that Samsung may outperform Apple in the mobile phone sector.
“The smartphones market has entered into the growth phase from a period of introduction. That will be more favorable toward Samsung that is apt at ‘mass customization’ than Apple with a one product strategy,” Lee said in a report.
Many global brokerage houses have also painted a rosy picture of Samsung’s future. Bank of America Merrill Lynch, for instance, raised the price target from 1.35 million won to 2 million won on March 23 before any other local or foreign firms did.
BoA Merrill Lynch refused to comment on the upgrade because the firm’s regulation does not allow analysts to comment on company-specific topics and the firm distributes reports on individual stocks to its clients only.
Australian financial juggernaut Macquarie’s securities unit also raised the target to 1.9 million won on April 30, citing “the growing optimism on the upcoming Galaxy S III phone.” Galaxy S III phone was unveiled on May 4 in London.
“We see no serious contenders to Samsung Electronics in smartphone space… We firmly believe that we are still a few quarters away from peak earnings,” Macquarie Analyst Daniel Kim wrote in the April 30 report.
Kim estimates Samsung’s smartphone shipment to rise from 44 million units in the first quarter to 52 million in the second quarter and the total smartphone volume to more than double to 225 million, which represents over a 30 percent share of the global market. Macquarie also raised the forecast for operating profit in 2012 by 18 percent to 30.6 trillion won.
For some analysts, a stellar performance of Samsung’s handset business seems inadequate to raise the stock price further.
“Expectation over the Galaxy S III smartphone has already been reflected on the stock price. Investors had known that there will be no competitors of the Galaxy S III when it was released,” Lim Dori, an analyst at Shinyoung Securities, said in an interview.
Lim said that for further increase in the stock price, robust earnings from handsets are a must and the semiconductor and LCD panel divisions need to perform better.
While most brokerages hiked Samsung’s price target to or near to 2 million won, Lim left it at 1.5 million won in his latest report about Samsung on April 30, saying that he would revise it once the price breaks the 1.5-million-won mark.
Hwang of Samsung Securities shares a similar view. The analyst suggested the price target of 1.55 million won in January, and hasn’t changed it since.
“The stock market has paid enough for potential profits from smartphones as Samsung Electronics’ new driving force. [The rally caused by the launch of the Galaxy S III] is a story that has already ended,” Hwang said.
Can’t run alone
“It isn’t really Samsung Electronics’ own limitation. If others stocks do not rise, Samsung’s won’t as much as its potential allows it to. It has been running alone far ahead of others stocks,” Lim Dori, an analyst at Shinyoung Securities, in an interview.
One of the reasons for the stock’s fall throughout May is closely related to the nature of the Korean market.
Often categorized as an emerging market, the Seoul bourse has been highly volatile in times of crises. Foreigners account for some 30 percent of the KOSPI’s market cap, and they freely withdraw or buy in capital according to the global economic climate. Local media even termed Korea’s capital market as “foreigners’ ATM.”
Because Samsung Electronics alone accounts for more than 18 percent of the Seoul bourse’ market cap at 178 trillion won and foreign investors own about a half of the firm, its stock naturally skidded during the flight of capital in May.
“To domestic investors, Samsung Electronics’ share is a mega large-cap stock. For foreign investors, it is a mid- and large-cap stock,” Lim said.
In a way, the scenario of the stock reaching 2 million won means a substantial change for the stock market.
The stock closed at 1,233,000 won Friday, and to meet the target, it needs to go up a whopping 62 percent in a year _ analysts usually suggest a 12-month price target.
Considering Samsung’s portion in the Seoul bourse’s market cap, such the increase can raise alone the benchmark index by more than 10 percent. Since the global crisis, the KOSPI has actually been stagnating despite dramatic upturns and downturns.
In fact, the rally of Samsung’s shares has already distorted the market. According to stock market information provider FnGuide, the exclusion of Samsung Electronics can bring the index down by some 100 points.
The environment for investing in Samsung Electronics is, to an extent, improving as the pool of capital ready to be put into its shares has expanded significantly.
Wealth management has gained immense popularity in the last couple of years. For the so-called wrap accounts, especially the “advisory-type” products, brokerage houses put investment from customers into a handful of stocks that have been recommended by investment consulting firms.
Samsung Electronics’ stocks became these investment consulting firms’ favorite after shares in energy and chemical stocks lost their charms.
As of January this year, Samsung accounted for more than 30 percent of Brain Investment Management’s portfolio and nearly 30 percent of KOne Investment Advisors, according to Maeil Business Newspaper.
The “herd behavior” of investing into Samsung as a safe haven has been criticized for risks from potential fall of the stock price amid the ongoing economic crisis and greater damages to investors. Some even found a silver lining in the stock’s losing streak as it may rebalance the composition of the Seoul bourse.
Hwang of Samsung Securities said the further rally of the stock requires a good economy that would improve all the divisions and clear uncertainties for the cyclical businesses.
He added that now isn’t the time for foreigners to bet on businesses sensitive to economic cycles. In the past six months, domestic investors have bought more shares than foreigners have and are reaching the point in which they cannot invest more.
“Foreigners are selling amid uncertainties while potential domestic buyers are very limited,” Hwang said.