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Technology Stocks : Samsung and Wireless

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From: Eric L11/3/2013 10:09:55 AM
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Samsung to hold a rare analyst day on Wednesday ...

"Though the share price has recovered [from an early June through mid-July slump], Samsung is trying to address lingering concerns in the market. It has invited 350 analysts and institutional investors to a special meeting Wednesday at a Seoul hotel for a rare gathering with the company’s top management. While other big technology companies routinely hold such sessions, it is Samsung’s first “analyst day” since 2005, and only its second one ever."

>> Samsung Prepares to Slowly Lift a Curtain to Investors

Eric Pfanner
The New York Times (Tokyo))
November 3, 2013

Secrecy has served Samsung Electronics well. Keeping its rivals guessing has helped the company, a South Korean technology giant, build a formidable lead in the smartphone industry, where it now sells more than one in three handsets worldwide.

This summer, however, Samsung suffered from an unusual loss of confidence among investors – caused in part by uncertainty over the company’s strategy and questions over what it intends to do with the $50 billion cash pile it has built up by selling all of those Galaxy S4’s and Note 3’s, as well as the chips inside them. From early June through mid-July, Samsung’s stock lost about one-fifth of its value.

Though the share price has recovered, Samsung is trying to address lingering concerns in the market. It has invited 350 analysts and institutional investors to a special meeting Wednesday at a Seoul hotel for a rare gathering with the company’s top management. While other big technology companies routinely hold such sessions, it is Samsung’s first “analyst day” since 2005, and only its second one ever.

“In the past they thought it was enough just to have rising earnings,” said Byun Han-joon, an analyst in Seoul for KB Investment & Securities. “Now they realize they need to be more investor-friendly.”

Company officials, including the chief executive, Kwon Oh-hyun, are scheduled to take to the stage of the Dynasty Hall of the Hotel Shilla – owned by another company in the Samsung industrial group – for a full day of presentations ranging from the company’s financial situation to the outlook for mobile phones, memory chips, display screens and other product areas.

“It will be a great chance to give investors better understanding on Samsung and to discuss its latest strategy and vision for 2020,” the company said in a statement.

Foremost in many investors’ minds is the future of the smartphone business, which provides about two-thirds of the company’s earnings. The summer sell-off was caused by concerns that smartphones were about to become commoditized. As differences in design and technology became less pronounced, companies like Samsung and its archrival, Apple, might lose their ability to charge a premium for high-end models, which now provide most of the profit in the industry. Apple faced similar worries.

After Samsung reassured shareholders with two strong quarterly financial reports, its stock price rebounded, and it is now back near its highest levels. While smartphones remain highly profitable, the company is also benefiting from a recent surge in the price of memory chips.

Samsung is the biggest maker of memory chips, accounting for about one-third of global output. It also makes display screens and other key components of smartphones. This separates it from Apple, which outsources the purchase of smartphone parts and their assembly, as well as other phone makers that have fallen on hard times, including BlackBerry, Nokia and HTC.

“There is still a perception gap around the Samsung model and how they can keep making money while all the others are crashing down,” said Sundeep Bajikar, an analyst at Jefferies, a brokerage firm, who is based in San Francisco.

Rather than crashing down, many analysts say, Samsung will continue to make a lot of money, with semiconductors contributing a growing share of earnings. Now investors want to know what Samsung intends to do with all that cash.

Mark Newman, an analyst in Hong Kong for Sanford C. Bernstein, predicts that the company’s cash pile will soar to about $77 billion next year and $160 billion in 2017. Apple, by comparison, currently has $147 billion in cash.

Yet investors have been seeing precious little of it. The percentage of net income that Samsung has paid out in the form of dividends or stock buybacks fell to 5 percent last year from 50 percent in 2004, Mr. Newman wrote in a note to investors.

That is one reason, he maintains, why the company’s stock price has lagged. Despite the recent rebound, Samsung trades at a significant discount to Apple, in terms of price-earnings ratios. It has less than half the market value of Apple, despite higher revenue.

In the run-up to the Samsung analyst meeting, Mr. Newman surveyed institutional holders of Samsung stock to gauge their support for several possible ways of rewarding investors: increasing the dividend, conducting a one-time share buyback, making repeated buybacks or combining all of these methods.

That might sound a bit like asking a child whether it would prefer chocolate, strawberry or vanilla ice cream, or a combination of the three. (Investors responding to the survey favored higher dividends and the Neapolitan option by roughly equal percentages.) Mr. Newman said such moves could drive up the share price significantly.

“The company needs to either return cash or convince investors of the next profit driver after memory – preferably both,” he said.

Others say it would be smarter for Samsung to keep its money and use it to invest in semiconductors, a highly capital-intensive business, and in other potential growth areas.

“I think their dollars or won are best invested in disrupting their competition,” Mr. Bajikar said.

Some analysts say another reason for Samsung’s lagging stock price is the fact that the shares are listed in South Korea, where they make up close to one-fifth of the value of the Kospi stock market indicator. Unlike other big international technology companies, including Sony and Panasonic of Japan and LG Display of South Korea, Samsung does not offer American depositary receipts, which provide a way for investors to trade shares on United States stock markets.

A stock listing in the United States could make it easier for individual investors who like Galaxy phones to buy a stake in the company that makes them. But it would also create new regulatory and disclosure requirements. And with an American listing Samsung might attract greater scrutiny from investors like Carl C. Icahn, who is trying to persuade Apple to buy back $150 billion in stock.

Analysts say they do not expect any big announcements along these lines from Samsung at the analysts’ day. During interviews, executives frequently cited the company’s long-term approach as a virtue, saying they paid little attention to short-term swings in the stock price. But the company acknowledged that secrecy has its limits.

“Samsung will continue to look for ways to be more open to shareholders,” it said in its statement on the analysts’ day.

- Eric L. -
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