By Matt Bolduc, Equity Analyst at Saxo Bank

Samsung Electronics became Apple's biggest rival in 2011, and is bound to surpass Apple's global smartphone sales in 2012. But while Apple is tied to the iPhone, Samsung is more than a one-trick pony.

What is Samsung Electronics? 
Samsung operates through 4 divisions: semiconductor, telecom, digital cameras and TVs.  The semiconductor division is the most profitable in terms of operating margin. This division creates many of the chips for the smartphone and tablet market (including Apple's iPhones and iPad, which represent an estimated 8% of Samsung's revenue).  The division is also dependent on the PC market which is expected to slow down in 2012.

The telecom division, which runs Samsung's mobile telephone business, has increased its sales by 39% in the past year, and the division's operating profit has increased by 90% in 2011. Considering that Samsung entered the smartphone market in 2010, this is a really strong accomplishment. As of Q3, Samsung had a market share of 17.8% for all mobile devices, and held an approximate market share of 20% in the smartphone segment. Continued and expected growth of the smartphone sector should be a boon for the company. 



The other 2 divisions are the digital camera division and the TV division, which both face razor-thin margins (see table 1). Because of the company's exposure to TVs, digital cameras and semi-conductors, the company's sales are very cyclical along with its margins. 

Samsung, large exposure to smartphones
Although Samsung is one of the biggest smartphone makers in the world, it is not directly an equivalent trade to Apple. Samsung is much more diversified and also has lower margins on its phone (15% vs Apple's 37%). But the company's stock price should still strongly benefit from its smartphone growth, both through its telecom divisions and semi-conductor division, which produces many of the chips for other smartphones. The movement of the stock price will therefore greatly benefit from the growth of the smartphone segment, but should the economy turn the corner, the stock will also benefit from the rest of Samsung's activities.



Not too expensive…
The company has grown revenues by an average of 14% and earnings by 11% over the past 5 years, in a very competitive environment. To bolster its margins, the company continues to cut costs, and because the company operates in the chip and hardware segment - which are extremely cyclical - the company could do very well once the global economy steadies itself.

Samsung, like most cyclical companies, is currently trading a low historical PE of 7.6x trailing earnings. It also has no net debt and has a strong 5Y average historical ROE of 16%. And of the 38 analysts covering the stock, 95% of them have a buy rating on the stock. 

An investment in Samsung will never be a substitute for Apple, but should investors want smartphone exposure with a bit more diversity than Apple, than Samsung  might be an interesting play.