We don’t cover stockmarkets and investments much here at Android Headlines and I don’t intend to go into any great detail, but a recent article posted at Barrons points out that Samsungs Electronics stock could be the cheapest mega-cap with the potential for it to rally by 50%. This is a sensationalist headline; Samsung’s stock has fallen more than 20% since the middle of the year but let me put this into perspective: it’s lost around $45 billion in market capitalization terms. Forty five billion dollars. It seems that the story is based on the fact that Samsung’s stock price has fallen so far that surely it must go up? Some of the time this happens, but only some of the time!
Let’s take a simplistic look to see how one measurement of how stock is valued, which is the multiple of expected earnings into the current price. Analysts talk about earnings per share, or EPS. The earnings per share is as you would expect from the title; it’s the amount that the business expects to make divided by the number of shares in circulation. We divide the share or stock price by the earnings per share to produce the price earnings ratio, usually called the PE or PER. Stocks within a particular industry typically trade at a similar PERs with changes associated with the potential of that business to increase profits. Samsung currently trades at eight times the estimated 2014 earnings. This compares with Apple’s PER of 16. This means that the market values Apple at approximately twice that of Samsung… and we have to ask the question of why?
There are many reasons for the valuation difference, but share prices reflect the expectations of a business more so than the history. It’s based on expected results. If the business has lower earnings than expected, this will change the PER; is Samsung’s earnings for 2014 are say 50% what is expected, the PER will double to bring it into line with Apple. If Apple’s earnings are less, the PER will also rise. Is the stockmarket expecting Samsung’s earnings to continue to drop and so the PER is going to change? We tend to see short term share price movements driven by sentiment: the perception is that Samsung has lost its way, has too many open projects and is struggling to make headway in difficult markets. I wrote about this a few weeks ago here and until this changes, we are unlikely to see any major share price movement. The business is under immense pressure… but it’s when businesses are under such pressure that great things happen.
One only has to look at Apple to see what I mean.