How Much Will The Note 7 Recall Cost Samsung?
Samsung Electronics (OTC:SSNLF) announced a recall of its Galaxy Note 7 devices earlier this month, after reports that some units were exploding due to a battery defect. U.S. regulators joined the process last week, with the Consumer Product Safety Commission (CPSC) working with Samsung on the recall and urging owners of the Note 7 to stop using their devices. While we currently estimate the cash costs of the recall to come in at a little over $900 million (see calculations below), the opportunity cost for Samsung could be much higher, given the strong momentum that the firm’s smartphone unit had been witnessing in recent quarters. Samsung’s stock has declined by roughly 5% since the recall was announced earlier this month, wiping off over $10 billion of the company’s market cap. The Note 7 was touted as one of Samsung’s most cutting-edge devices, and its recall could call into question the company’s broader quality and safety standards. The negative news cycle around Samsung’s flagship product could also steer potential customers towards Apple’s new iPhone 7, which goes on sale on September 16.
We have a $1,370 price estimate for Samsung, which is roughly 10% ahead of the current market price.
See our complete analysis for Samsung
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Estimating Cash Costs Of The Recall
Samsung is currently allowing U.S. customers to trade their Note 7 devices in for a Samsung Galaxy S7 or Galaxy S7 Edge, with the price difference between the devices being refunded. Alternatively, customers can opt to receive a new Galaxy Note 7, pending approval from the CPSC. Some U.S. carriers have been handling the recall differently, with T-Mobile offering full refunds to its Note 7 customers. Either way, we expect the net cost of replacing a device to be roughly similar, with costs associated with bill of materials and manufacturing of a new Note device accounting for a bulk of the total. Samsung will also incur significant costs related to logistics, planning and other overheads in orchestrating a recall of this magnitude. The company will also offer customers a $25 gift card. Below we provide a rough estimate of what we think the cash costs of the recall will be.
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