A mispriced vertically integrated firm is up for grabs
(005930 KS, SMSN LI)
INVESTMENT HIGHLIGHT - BUY
When interest rates are rising, investors’ willingness to pay up for high-growth companies declines and they instead choose companies with steady earnings that trade at low multiples and are less sensitive to interest rate movements. Samsung Electronics is such a company. Samsung Electronics’ diverse set of business segments produces steady earnings growth. It trades at a modest 10x forward FY22 earnings.
ESSENTIALS
Samsung Electronics divides itself into five business segments. All those business segments operate in highly competitive markets. Companies that are in tough businesses do not trade at high P/E multiples. However, Samsung has a couple of competitive advantages that justify a higher valuation. The most important may be Samsung’s size. Samsung is a leader in many of the businesses in which it operates.
It is always hard for investors to get their heads around the large Korean diversified conglomerates known locally as chaebols. They often have a mix of businesses which offer little synergies. For example, Samsung is one of two companies capable of manufacturing the most high-end semiconductors for the likes of Apple (AAPL) and NVIDIA (NVDA). While at the same time, Samsung’s consumer electronics segment makes appliances.
The two most important business segments for Samsung Electronics are semiconductors, and IT & mobile communications (cell phones/tablets). The semiconductor segment separated into two businesses – memory chip manufacturing and the foundry business.