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After sudden fall, Samsung is undervalued

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Market-leading smartphone maker suffers share slide following cut in sales forecasts as suppliers report scaled-back orders. There is a familiar ring to this, yet it is not Apple but Samsung Electronics which has just suffered its worst week in over a year. The fall was predictable, but it is hard to justify.

The culprits were JPMorgan and Morgan Stanley, who cut their estimates for sales of Samsung's Galaxy S4 smartphone by a quarter and almost a sixth respectively to some 60 million for 2013, dropping price targets for the stock by 6 per cent and 3 per cent in the process. Cue Samsung falling almost a tenth in a week. Any reports that ponder whether a phonemaker is a Nokia (down 90 per cent from its peak) or an Apple (off more than a third in nine months) are likely to spook markets, whether or not investors had noted the company's own cautious smartphone outlook just five weeks ago. Phones matter greatly to Samsung: they will produce about two-thirds of its operating profits over the next two years. And as competition grows, margins will of course come under pressure. But this is not new and there is no sign of collapse. There is also a case to be made that offering phones at different prices, as Samsung does, is a better cushion against eroding profitability than relying on one model which is aimed solely at the high end of the market.

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But the most interesting point about Samsung is not its phones but its valuation. It says a lot that even after slashing sales forecasts, both analyst reports still saw one-quarter worth of share price upside in the next year – in line with other analysts. Samsung's valuation, in analyst-speak, is "undemanding." It trades on 7 times expected earnings versus 11 for Apple and 33 for Sony. Just 3 per cent of analysts, according to Bloomberg, do not have "buy" calls on Samsung, versus a quarter for Apple. There are some long-running reasons for Samsung to trade at a discount – its position in a chaebol for one. But if overall sales hold up as expected, this concession looks extreme.

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