Samsung’s Preliminary Q3 Results Could Reveal Extent of Note 7 Fallout

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (OTC:SSNLF) is likely to publish preliminary Q3 2016 earnings in early October, and investors will be closely watching the numbers to size up the impact of the Galaxy Note 7 battery fire issue on the company’s financials. As of Q2, Samsung had posted four straight quarters of operating profit gains (revenues and operating profits were up 5% and 18% year-over-year, respectively, during Q2 ), amid soaring sales of its high-margin flagship smartphones, but we expect to see a decline for Q3 on account of the Note 7 recall.

We have a $1280 price estimate for Samsung, which is slightly below the current market price.

While we currently estimate the cash costs of the recall to come in at under $1 billion (see calculations here), a manageable sum for a company of Samsung’s size, the real damage could come in the form of weaker brand equity and lower demand for Samsung’s top-end smartphones.  In early September, Samsung had to suspend sales of the Note 7  – which many reviewers praised as the firm’s best smartphone design to date – missing a crucial window of opportunity before Apple ramped up production of its iPhone 7. Moreover, the bad press surrounding the Note 7, coupled with Samsung’s mismanagement of the recall process (quick to acknowledge the issue, but slow to provide replacements) could create near-term trust issues, potentially diverting customers towards Apple’s new device and Google’s branded handsets, which are slated to release in early October.

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