Not so fast

Samsung looks stuck in a dynastic value trap

Samsung Electronics looks stuck in a dynastic value trap. After a miserable year, the South Korean conglomerate's shares are trading at a rock-bottom earnings multiple. Though the pessimism is probably overdone, increased competition in smartphones and the Lee family's succession plans could delay any revival.

By its own admission, Samsung has been slow to respond to rapidly changing competition in the smartphone business. Although phone shipments grew slightly, cheaper Chinese rivals like Lenovo and Xiaomi squeezed Samsung's margins. The group's operating profit in the third quarter was 60 per cent lower than in the same period of last year, and it's worst quarterly result in three years.

The Samsung sell-off may already have priced in a lot of bad news. After a 13-per cent decline this year, Samsung shares trade at a multiple of less than eight times its earnings for the last 12 months. That's the lowest of any its peers. Rival Apple, which is also sitting on a large pile of cash, trades on a multiple of more than 16 times. Samsung's valuation implies that the operating profit margin for its IT & Mobile Communications division will fall to 3.1 per cent in 2015, according to Bernstein. The unit reported a 7.1-per cent margin in the latest quarter.

Mobile accounts for less than half of Samsung's operating profit, with the rest coming from televisions, semiconductors, and display panels. Yet smartphones have been the main driver of the conglomerate's earnings in recent years. Samsung doesn't seem to have a compelling strategy to differentiate itself from its equally ambitious peers. It's too early to say whether the innovative curvy screens and wearable devices will make up for the slowdown.

Meanwhile, inheritance issues may interfere with hopes that Samsung might share some of its $50-billion net cash pile with shareholders. The Samsung Group has been busy restructuring in light of the ill-health of patriarch Lee Kun-hee. A higher payout, which would raise Samsung's valuation, is not in the interests of Lee's children until they secure a firmer grip on the electronics business, in which the family owns just a 4.7-per cent direct stake.

Though Samsung may be trading at rock-bottom multiples it's likely to ring flat for a while.