Samsung’s status with analysts shows some slippage

The Samsung Electronics slump that wiped out $28 billion of market value in six weeks will deepen as Apple and Chinese rivals take market share in handsets, according to the stock’s most-accurate forecaster.

Shares of Samsung have fallen 13 percent since Nov. 29, losing more market capitalization than any other company worldwide. The stock will sink an additional 11 percent, said Adnaan Ahmad, an analyst at Berenberg in London whose recommendations during the past 12 months produced the best return among forecasters tracked.

Samsung, the world’s biggest smartphone maker, posted its first profit decline in nine quarters in the final three months of 2013 amid growing competition from Apple’s iPhones and budget devices from Chinese producers. While bulls say the stock will rally after its valuation fell to the lowest level in at least three years versus global peers, Ahmad says investors will sell as operating profit margins at Samsung’s mobile business shrink.

“Selling is totally justified because the market now understands that the margin profile will change drastically,” said Ahmad, who has covered technology companies for 16 years at firms including Merrill Lynch & Co. and Morgan Stanley. “Samsung is in a very precarious position in the next 12 to 18 months.”

Ahmad, who cut Samsung shares to sell from buy as they traded within 2 percent of a record high in March, has been out in front of a bearish shift in sentiment toward South Korea’s largest company by market value. The average price target for Samsung shares has dropped about 12 percent since June, including a 4 percent decline in the past six weeks.

Most analysts still don’t recommend selling. Ahmad has one of only two such ratings, among 48 buy calls and 3 holds. The consensus recommendation among analysts tracked is the highest among the world’s 50 largest companies by market value and Samsung’s mean price target is 37 percent above its closing level of 1.3 million won ($1,221) Monday.

Samsung plans to maintain its focus on managing its supply chain while delivering a “full lineup” of smartphones with varying levels of price and features, the company said in an email statement to Bloomberg News on Monday.

The stock is “very cheap” after its retreat, said Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management, which oversees about $60 billion, in an interview in Seoul on Jan. 10. Samsung, led by billionaire Chairman Lee Kun-hee, also has a track record of introducing “smart” new products across its businesses, which include displays and semiconductors, according to Do.

Samsung is valued at 6.4 times analysts’ earnings estimates for the next 12 months, a 55 percent discount versus the MSCI All-Country Information Technology Index, according to data compiled by Bloomberg. The 13 percent drop in Samsung shares since the end of November compares with a 4.2 percent decline in Apple and a 3.8 percent gain in Lenovo Group, a Chinese maker of handsets and PCs.

The Korean company’s stock has benefited from a surge in purchases by foreign investors, as economic recoveries in the United States and Europe boost demand for the nation’s exports. Overseas money managers bought about $13 billion of South Korean equities in the second half, including a net $4 billion of Samsung shares, data show.

Samsung has the biggest weighting in the benchmark Kospi index, which has slipped 3.1 percent this year. The won has weakened 0.7 percent against the dollar, while the yield on the government’s 10-year notes has increased four basis points to 3.64 percent.

“Improved global demand is a strong driver for the success of Korea’s exporters and has contributed to our more positive view on the country,” Andrew Swan, the Hong Kong-based head of Asian equities at BlackRock, the world’s biggest money manager with about $4.1 trillion under management, said in an email response on Jan. 6. He didn’t mention specific companies.

Samsung’s smartphone business will remain a drag on the stock, according to Ahmad. Margins at the unit, which account for about 65 percent of operating profit, will probably drop to 13 percent next year from about 18 percent in the third quarter, he wrote in a Jan. 7 report.

The company, which has a 35 percent share of global smartphone sales, is getting squeezed by a “saturated” market for high-end handsets and smaller profits for cheaper models, Ahmad said.

Sales of Samsung’s Galaxy S4 have slowed amid competition from the iPhone 5S and 5C, along with Chinese handsets priced as low as $100.

Bloomberg