Samsung Shareholders Shrug Off Galaxy Note 7 Smartphone

Samsung Electronics . watchers wasn’t caught off guard by the company’s strong third-quarter earnings guidance: its shareholders, who shrugged off embarrassing headlines about its global phone recall to push Samsung shares to an all-time high.

On Friday, the South Korean technology giant said it expects to earn 7.8 trillion Korean won ($7.0 billion) in operating profit for the three months ended September 30, a 5.5% improvement from a year earlier, during a period that includes the company’s recall of 2.5 million Galaxy Note 7 smartphones.

Final earnings results won’t be released until later this month, but the profit preview highlights the merits of Samsung’s diversified business model, particularly during periods when one of its business units has suffered a setback.

It also vindicates shareholders who argued that concerns about the Galaxy Note 7 recall, while awkward for the company, were overdone.

In addition to smartphones, Samsung is a dominant player in the market for technology components like semiconductors and display panels—and that business unit has been firing on all cylinders.

While the Galaxy Note 7 fiasco continues to attract negative attention—a U.S. passenger plane was evacuated earlier this week after a Samsung device began emitting smoke—the company’s shareholders have kept their eyes fixed on Samsung’s strength in technology components.

After a 13% slide in the stock after initial reports of smartphone explosions, shareholders quickly erased those declines to push Samsung shares back up into record territory.

Expectations for corporate governance changes have also fueled some of the recent gains. On Thursday, a day before Samsung’s third-quarter earnings preview, shares jumped 4.5% to a new record high after U.S. activist investor Elliott Management Corp. argued that Samsung was undervalued by as much as 70%. Elliott also pushed for a company split and governance reforms.

On Friday, after the release of its earnings preview, Samsung’s stock tacked on another 0.9% to finish above the 1,700,000-won mark for the first time in its history.

Among his clients, “the recall was seen as a serious, but short-term, issue,” said Daniel Kim, a Seoul-based analyst for Macquarie Securities.

Instead of focusing on the phone recall headlines, some investors have directed attention towards Samsung’s quiet but steady gains in semiconductors. The company is now an undisputed market leader in DRAM memory chips and next-generation flash memory

Samsung also has a substantial lead over its rivals in sales of smaller organic light-emitting diode, or OLED, panels, which are increasingly being adopted for use in premium smartphones.

“It’s hard to ignore the recall costs, but the semiconductor and display markets are solid,” said Lee Seung-woo, an analyst at IBK Securities in Seoul, who said that the company was benefiting from what he called “intense demand” for OLED panels from Chinese smartphone makers.

As a result, Mr. Lee said, Samsung Display, an 85%-owned subsidiary of Samsung Electronics, is expected to see a sixfold jump in operating profits, as profit margins for the division forecast to jump to about 14.5%, compared with 2.2% in the April-to-June period this year.

Even its smartphone woes may not turn out to be as damaging to the bottom line as many fear, analysts say, though they add that Samsung would likely forfeit about three million units in Galaxy Note 7 sales. The company’s preliminary guidance didn’t provide any detail on the extent of the damage caused by the smartphone recall.

Most analysts expect the company to rack up between 2.4 trillion and 2.9 trillion won in mobile operating profits for the quarter, which would mark an increase from the same period last year. Mobile profit margins are also expected to inch higher by 3 percentage points from the third quarter of 2015.

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