Dear Mr. Buffett,
Hope you are well. We do not know whether this email ever reaches you, as you are not on our distribution list. We hope that one of the thousand-plus readers has enough influence with you to forward this message to you. Or, this message’s self-referential wit and self-deferential style causes one of the journals you read to republish it.
Because we have an ideal stock for your portfolio. Samsung Electronics.
We know you won’t dismiss it because of the prima-facie “commodity” stock impression. Your legendary investments in Japanese trading companies demonstrate your ability to see value beyond conventional labels.
You can hardly call this popularly recognized memory-maker a commodity play—a perpetual bridesmaid, perhaps, but not that. It is second to Apple in phones by profits and second to TSMC in foundries. Its decades-long reign at the top in TVs globally is rarely considered, and similar leadership in memory-making is also being pooh-poohed these days, mainly because it is trailing in the high-performance, high-margin HBM to SK Hynix.
This USD300bn giant is trading at barely 11x 2024 PE. Despite its worldwide brand recognition, it trades at the book value. Its memory competitors with a far less illustrious history, like SK Hynix and Micron, command 1.85 and 2.35x PB, respectively.
If you think this is because the company might not have enough profit focus, Bloomberg numbers suggest a different picture. The company has been profitable for 25 years, with average ROE and ROCE in the mid-teens. It has also paid out dividends all the time.
Lest you think it is something to do with the group, we have the example of Samsung Biologics, which trades at 72x 2024 PE and 7.4x PB.
In this analyst’s experience, Korea is famous for these types of absurd valuations. Still, Samsung Electronics has to be considered unique. Since I wrote about its unbelievable valuations first in 1999 (which I thought was due to the nature of the domestic liquidity pool), the stock has provided annualized, double-digit Dollar returns. The returns are similar for those who invested 20, 15, or 10 years ago.
The fear, of course, is if the stock remains in the same valuation range forever and one’s gains are only in line with its ROE, which is good but not great. We believe there are three reasons why this may change:
a. In the world’s most critical industry, foundries, there is TSMC, and then it is Samsung Electronics. From the US to Abu Dhabi, India, and Europe, every major government talking to TSMC is also wooing Samsung to establish facilities in their regions. This is not an invitation extended to too many others into semi-manufacturing apart from these two. Given the likely other positives, we do not need to talk about how Samsung is also in the unique club of two with Apple in Smartphones or in HBM with Hynix/Micron.
b. For someone like Masa-San, Mukeshbhai, Gautambhai, or any of the sovereigns from Europe, a substantial Softbank’s ARM-like stake in Samsung would make massive sense in multiple ways. The company is too big for the likes of QCOM to prefer it over INTC. And, the Korean laws are not too friendly for some private investors to take the company private like what the Bain-led consortium did with Toshiba Memory. But, in a world with extreme geopolitical risks, Samsung’s IP in foundry and phone-making are of extreme importance at some point to any of the listed giants in the US. Even if none can take over the company, strategic stakes must be a question of time.
c. It is not just activist investors like Elliott; the Korean government is also exerting pressure on the group to value unlocking. The company is unlikely to be able to pay lip service to “Value Up” announcements that it will have to do in the coming weeks, as what it does will be a reflection on the whole Korean corporate sector. Since 1999, this analyst has believed that Samsung Electronics should split, but equally why it will not because of the group-level strategies. A split may still not be on the cards immediately, but something has to give. SEC is net cash; its long-term debt (not counting the cash) is only 15% of its equity capital. Even with its capital expenditure plans, it has the capacity for substantial share buybacks akin to Microsoft's multi-billion-dollar repurchases.
The halo around the group and the company have faded. Still, it is difficult to justify such deep value for a leader in the sector where all else trades at multiple multiples with far weaker earnings growth, quality, and history. At GenInnov, we're maintaining our position, confident in its undervaluation and innovative strengths, many of which exceed the scope of this letter. SEC is one of its kind, but we have some other names, too, that are mispriced for the new world we live in.
We realize this letter may be lengthier than typical journal fare or perhaps your patience. It will likely be useful to some of our readers. It is definitely useful to us in re-building our conviction.
GenInnov Team
