Saturday, October 25, 2008

Samsung: Good News Despite Bad Earnings

Samsung: Good News Despite Bad Earnings

Samsung Electronics executives are putting on a brave face after the company posted disappointing quarterly results. On Oct. 24 the Korean giant announced net profit for the third quarter was down 44% from a year earlier, to $1.15 billion. But, they say, they have reason to stay optimistic about their future.

And they have a point. For starters, Samsung is outdoing its rivals. The world's second largest semiconductor producer after Intel (INTC), Samsung is the only company in the black among makers of chips used for PC memory and for storing data in portable gadgets such as digital cameras and music players. (Intel is not in the memory chip business.) Chipmakers from Korea, Taiwan, and Japan, in contrast, have all reported big losses. Samsung, the No. 2 mobile-phone maker after Nokia, is also the only major handset company that increased shipments in the three months that ended in September.

Perhaps more important, Samsung has a big war chest. After it dropped a $5.85 billion bid (, 10/22/08) to acquire SanDisk (SNDK) this week, it is sitting on a cash reserve of some $7.6 billion that will allow it to keep investing in research and development, marketing, and factories—a luxury its cash-strapped rivals in the chip industry can't afford. Samsung will keep "widening the existing gap with competitors," says Samsung Executive Vice-President Chu Woo Sik. "We will have enhanced our leadership [for] when the market recovers."

Another advantage for Samsung is a weak Korean currency. The won, which has fallen by more than 40% this year against the dollar to become the world's worst-performing currency, is making Samsung much more competitive in export markets (, 9/19/08). This is particularly so as rivals from Japan such as Sony (SNE) and Toshiba (6502.T) are suffering from a strengthening yen (, 10/23/08).

Memory Chip Glut

To be sure, the headline numbers are grim. Samsung's third-quarter profit was its worst in more than three years. Its net profit margin in the three months leading up to September was just 6%, down from 13% from a year earlier, although sales grew 15%, to $18.1 billion. That's largely because the memory chip business, traditionally Samsung's cash cow, is suffering from a supply glut. Prices for a typical DRAM chip used for PC memory dropped 17% from the beginning of July to the end of September; prices for NAND flash chips used widely for digital cameras plunged 35%.

And the worst may not be over. "We foresee the coming months to be an even more challenging period," Chu admits. Many semiconductor analysts say memory chip prices are expected to stay weak until the first half of next year, with a rebound expected in the second half. Samsung's semiconductor division posted an operating profit of $226 million in the third quarter, down 74% from a year ago, but even that small profit is widely seen being wiped out in the fourth quarter.

Still, as bad as things are for Samsung, things are much worse for its rivals. Among Samsung competitors swimming in the red are crosstown rival Hynix Semiconductor, Japan's Elpida Memory (6665.T) and Toshiba, and Taiwan's Powerchip Semiconductor and Nanya Technology. "Samsung certainly has enough cash to weather the industry meltdown and will be poised to reap benefits from an increased market share in an upturn," predicts Song Myung Sup, chip analyst at brokerage HI Investment Securities in Seoul. Song figures Samsung's DRAM market share will rise to 32% by next June from 21% at the beginning of last year.

Another good piece of news for Samsung during this time of economic woes comes from its handset business. It sold 51.8 million phones in the quarter, a quarterly record and up 13% from the previous three months—nearly triple the pace of growth for the global handset market, which grew 5%. Senior Vice-President Chi Young Cho at Samsung's telecom unit predicts the company will exceed its target of selling 200 million handsets this year, up from 161 million last year.

That means Samsung's market share is rising again. The 200 million phones represent a global market share of more than 16%, up from 14.3% last year and 11.5% in 2006. "Samsung is cementing its position as the world No. 2," after overtaking Motorola (MOT) last year, says technology specialist Michael Min at fund manager Tempis Capital Management. Song at HI recommends a "buy" for Samsung shares. "The stock will fluctuate in the short term, but I see it rising by more than 50% in six months," Song says.

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