While Apple Inc. has recently surpassed US$1 trillion (1,128 trillion won) in terms of market capitalization for the first time in the world, South Korea's tech behemoth Samsung Electronics Co. is stuck at price-to-earnings ratio (PER) of 6.
A low PER is often interpreted as a signal of an upswing in stock prices in the future, but Samsung Electronics is not enjoying the low PER effect due to an unstable outlook on performance, which is fueled by concerns about a downturn in the semiconductor business.
According to the Korea Exchange (KRX) on August 5, Samsung Electronics shares closed at 45,750 won (US$40.56) on the main KOSPI bourse on the 3rd, up 0.44 percent, or 200 won (US$0.18) from the previous trading day. The closing price showed a steady tone with an upward tendency. However, the price almost fell below the 45,000 won (US$39.89) as it dropped to 45,450 won (US$40.29) during the mid-day trading. The price of Samsung Electronics shares had been going down every month after the stock split in early May and it decreased 13.67 percent compared to 53,000 won (US$46.99) when Samsung Electronics resumed trading after the stock split. The company posted 14.87 trillion won (US$13.18 billion) in operating profit in the second quarter, bringing a halt to its seven-quarter-straight streak of record profits. The poor performance adversely affected the price of its shares.
Samsung Electronics is paying out the largest-ever dividends but the market is giving a cold response. Some securities companies even say that the percentage of Samsung Electronics should be reduced when investing in stock dividend funds according to policies that strengthen shareholders’ rights, including Stewardship Code.
Equity funds, including South Korea’s major stock has dividend funds, adjusted their earnings rates by raising the percentage of large-cap stocks on the KOSPI, like Samsung Electronics, for the last two to three years. In fact, 162 funds included the highest stock position of Samsung Electronics in their portfolios among domestic stock dividend funds. Out of the 162, 106 funds have more than 10 percent of share of Samsung Electronics. They maintained a high rate of returns through Samsung Electronics until the first half of last year even when the company had a low payout ratio. However, things have recently changed. “KB Research High Dividend Securities” equity fund, whose Samsung Electronics’ share reaches 20.52 percent, showed poor performance in terms of earnings rate with -6.65 percent in the past year and -11.41 percent in the past three months. This is because the price of Samsung Electronics plummeted after some market researchers said the semiconductor boom cycle ended.
In contrast, Samsung Electronics’ biggest smartphone competitor, Apple, sees its corporate value surge. The stock price of Apple, which became the first listed firm in the US that exceeded US$1 trillion (1,128 trillion won) in terms of market capitalization on the 2nd (local time), closed at US$207.99 (234,613 won) on the 3rd, up 0.29 percent from the previous trading day. Accordingly, its market capitalization rose to US$1.0046 trillion (1,133.19 trillion won). The price of Apple shares has been on the increase every day after the company announced its Q2 results that surpassed market expectations on July 31.
Samsung Electronics has a higher possibility of the increase than Apple in terms of PER, which is a traditional model to evaluate stock prices on the stock market, but this is not the case in realty. According to DB Financial Investment Co., Samsung Electronics’ PER is 6.4 based on this year’s corporate earnings estimates, which is lower than 9.4 of the KOSPI average. On the other hand, Apple’s estimated PER for the next 12 months is 15.7, which is more than two times higher than that of Samsung Electronics. The PER is the ratio of a company's stock price to the company's earnings per share. A lower ratio means undervaluation on the market. In other words, it is normal that the price of Samsung Electronics shares will increase in the future because it is lower than not only Apple but also other KOSPI-listed firms considering its profits earned given the current index.
However, the PER is just one of the standards and a gloomy prospect for corporate earnings is a sticking point. This is largely due to market outlook for unstable semiconductor business which accounted for 78.6 percent of Samsung Electronics’ total operating profit in the second quarter. Market research firm DRAMeXchange expected the price of NAND flash chips would continue to drop until the first half of next year. In this case, Samsung Electronics can see its corporate earnings decrease further. By contrast, the iPhones took up 60 percent of Apple’s total sales, but the sales of the company’s service sector, such as the App Store, Apple Pay, iTunes and Cloud, rose as much as 31 percent in the second quarter from a year earlier. As Apple has succeeded in diversifying revenues, it is receiving positive reviews from the market