Reading Into Samsung’s Big Earnings Surprise

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (OTC:SSNLF) published its preliminary earnings figures for Q4 2016, projecting a consolidated operating profit of 9.2 trillion won (about $7.2 billion), marking its best quarterly performance in about three years. While the company didn’t spell out the factors that drove earnings, it likely benefited from stronger pricing and demand for semiconductor and display components. Moreover, the smartphone unit potentially saw a sooner-than-expected rebound from the costly recall of its flagship Galaxy Note 7 handset during Q3.

We have a $1,340 price estimate for Samsung Electronics, which is slightly ahead of the current market price.

See our complete analysis for Samsung

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DRAM Prices, Display Demand And Currency 

Samsung’s components businesses are likely to have been the biggest driver of quarterly earnings. The company’s memory business is likely to have seen earnings improve driven by stronger demand for NAND memory, with mobile OEMs increasing memory content on devices and also due to stronger pricing for DRAM. PC DRAM prices have been benefiting from under-supply in the market, as major vendors have been reducing their production mix in favor of mobile DRAM. For example, the contract price of 4GB PC DRAM DDR3 modules is estimated to have risen by 39% in the last two months. Samsung’s display unit is also likely to have performed well, driven by a recovery in the LCD business and stronger demand for OLED displays from smartphone vendors. Additionally, there is a possibility that the recent depreciation of the south Korean won (down by close to 9% in Q4) also helped to boost profitability, as Samsung’s component sales are settled in U.S. dollars.

Smartphone Business May Be Recovering Sooner Than Expected

The fourth quarter was expected to be challenging for Samsung’s smartphone unit, given the recall and eventual discontinuation of the flagship Note 7 phablet in September. While Samsung booked a bulk of the costs related to the recall during Q3, the negative news cycle surrounding the device was expected to have weighed on the company’s smartphone brand, hurting consumer confidence. Moreover, competition also mounted during the quarter, with Apple ramping up production of its new iPhone 7 and with Google launching its well received Pixel handsets in October. However, the mobile unit may have fared reasonably well, despite the odds, potentially driven by sales of the premium Galaxy S7 as well as mid-range phones such as the A series and J series.

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