Samsung Electronics has recently announced a global recall of 2.5m units of its new Galaxy Note 7 smartphone due to faulty batteries that could explode while being charged or when exposed to high heat. This global recall will not only put a dent on their financials this year but might also create negative consumer sentiment towards the brand.
Surprisingly, the market seems to be less pessimistic about Samsung Electronics Ltd as the stock price seems to be relatively resilient towards the incident. We can see that the stock price of Samsung Electronics did not move significantly after the announcement of the total recall. In fact, the stock price increased 3% since the news was released.
Does It Not Impact Financials?
Analysts have estimated that the recall is likely to cost Samsung between KRW 1 trillion to 1.5 trillion (~ SGD$1.25b to SGD$1.9b) in profit. This total cost includes the net cost of replacing new phones and the lost in sales opportunity during the two-week period of recall. To give a perspective, the net profit of Samsung Electronics was KRW 19.06 trillion in 2015.
This event could also cause negative consumer sentiments, hence the total shipment of Galaxy Note 7 could also potentially decrease, resulting in a further loss of revenue.
But Why Are Investors Not Reacting To It?
The negative news could be offset by the positive future outlook on Samsung.
Although revenue from the mobile division takes up ~50% of the total revenue generated (based on 2015 financials), the market is optimistic about business growth in other subsectors, such as memory storage and LCD. This is also coupled with the optimistic long-term prospect of Samsung Electronics in Organic Light Emitting Diode (OLED) and Negative-AND (NAND) gate, and also their shifting into the production of important auto components.
Besides, on a valuation perspective, Samsung Electronics is now relatively inexpensive as compared to their historical data and competitors. For instance, the price-to-book is currently trading at 1.1x PB, versus the historical average of 1.4x for 10 years. This means that you only have to pay for $1.10 every $1 worth of book value (the theoretical value shareholders receive if all the assets are sold).
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Conclusion
In summary, as Samsung Electronics diversifies their business segments, investors are still optimistic about the future outlook for the growth of other segments. Hence, their share price is still holding well despite the global recall.
Samsung Electronics is only one of the many examples of why the share price of a company is not solely dependent on a single news incident. As the stock price is always an expectation of future earnings, it is important to understand the market sentiment and the growth story of the company before making any investment.
Top Image Credit: DollarsAndSense.sg
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