By Craig Maddock, CFP, FCSI, CIM, FICB, CFA, MBA
Vice President, Investment Management
I’ve been travelling frequently over the past few weeks, and once again on my flight this morning, we were told not to use Samsung Galaxy Note 7 smartphones because of the risk of fire.
Customers of the Galaxy Note 7 started reporting back in August that their phones were exploding. Samsung recalled the model in September and shipped replacement devices, which continued to catch fire. On October 11, the company announced that it would stop production of the phone altogether.
Needless to say, the damage to Samsung’s stock price—as well as its brand and reputation—has been significant. Over the past week, the stock has fallen about 8% and is down 1.3% so far this quarter (calculated in Korean won). That means Samsung has lost over US$17 billion in market value since October 10. The company estimates that it will cost over US$5.3 billion for the recalls and discontinuation of the phone.
We own Samsung in four MD Funds and two MDPIM Pools, with the largest weighting at 2.5%. While we don’t like the recent drop in the stock price, we’re not rushing to the fire exits on Samsung.
The flaming phone issue is a short-term problem. The question is whether Samsung will be able to take action to restore its brand and reputation over the coming months and years.
Samsung is a large company and smartphones are only a part of their business. Other parts of the company continue to remain attractive, such as its memory business. With recent consolidation within the memory industry, as well as solid long-term demand from smartphones, we think Samsung’s memory business should have a better-than-expected margin profile throughout cycles.
Over the past 12 months, shares of Samsung are still up nearly 25% (in Korean won), as of October 14. We believe the company will be able to fix the smartphone problem and continue to introduce innovative products in the future.
When you compare Samsung’s cost with its loss in market value, we think the market has over-reacted to the smartphone problem. As of now, we continue to hold Samsung shares in our funds and pools and will keep a close eye on the situation.