Samsung Deals With Explosive Issues

Company's problems with smartphone compounded by problems with washing machines

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Oct 04, 2016
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When it rains, it pours.

That line originated as the advertising motto for Morton Salt in 1911. Prior to that time, salt was sold in large grains that tended to clump when conditions became humid. Morton reduced the grain size and added an anti-caking agent.

To promote this product development, Morton’s advertising agency came up with a play on an old English proverb – “It never rains, but it pours” – that reversed the negative connotations of the original, turning it into a positive for Morton Salt, a subsidiary of K+S AG (XTER:SDF, Financial) since 2009.

However, as time passed, the Americanized version of the proverb became negative again. Morton has used other mottos since, and few people have an issue with clumping salt anymore, but most people are familiar with the original motto and understand that, when someone says, “When it rains, it pours,” that person is speaking of a streak of misfortune.

Samsung Electronics (XKRX:005930, Financial) should empathize.

On Aug. 19, the company released its Galaxy Note7 smartphone only to learn shortly thereafter that the phone had a problem with overheating and exploding. Not every phone has overheated, of course, but Samsung announced that “because our customers’ safety is an absolute priority at Samsung, we have stopped sales of the Galaxy Note7. For customers who already have Galaxy Note7 devices, we will voluntarily replace their current device with a new one over the coming weeks.”

Samsung’s voluntary recall of the Note7 wasn’t the end of the issue. Soon after came reports of phones exploding in a child’s hand and while recharging in a vehicle, and a Note7 may have been responsible for $1,300 in damages to an Australian hotel room. USA Today wrote that the company could lose up to $900 million in the third quarter because of the recall.

Well, that was Samsung’s problem in August.

After management announced on Aug. 31 that it planned to delay shipments of the phones, Samsung’s share price, which had been falling since the issue with the phones surfaced, began to rebound, especially after a suspension of sales was announced on Sept. 2.

Samsung officials could be forgiven for hoping the worst was over.

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Then, as September was winding down, came a new problem. Reports indicated that Samsung’s top-loading washing machines also had problems, suggesting they, too, were exploding, but the Washington Post clarified, reporting that “it’s not the sort of explosion, as with the lithium ion batteries in phones, caused by chemical reactions,” in an article about a lawsuit that has been filed against Samsung.

“Some washing machines, the suit alleges, vibrate violently under heavy loads,” the Post reported, “causing the tub to ‘become unfastened, resulting in a dramatic centrifugal explosion that destroys the machine and nearby property.'”

The lawsuit alleges Samsung knew about the problem with the washing machines for years and neglected to inform consumers, the Post wrote.

“CPSC is advising consumers to only use the delicate cycle when washing bedding, water-resistant and bulky items,” the Consumer Product Safety Commission said in a statement Sept. 28.

The same day, Samsung issued a statement of its own. The company also recommended that consumers use the delicate cycle but observed “Samsung customers have completed hundreds of millions of loads without incident since 2011.”

Meanwhile, Lowe’s (LOW, Financial), operator of a North American chain of home improvement and appliance retailers, notified Tulsa, Oklahoma-area customers who had ordered Samsung washing machines that it would not sell them until Samsung’s investigation is complete.

Samsung has pulled its advertising for the washing machines, just as it did with its advertising for the Galaxy Note7. A senior partner at Tenet Partners told AdAge that is not an uncommon approach.

“What you usually find is that brands will replace it with other messaging about the recall, how they're going about rectifying it and what they're doing for their consumers,” Russ Napolitano told AdAge. “They shift from a selling mode to more of a reassuring mode.”

David Herro (Trades, Portfolio) is Samsung’s leading shareholder among the gurus with 325,000 shares, which is 0.23% of Samsung’s outstanding shares and 1.82% of Herro’s total assets. The guru reduced his position by more than one-third in the second quarter. Charles de Vaulx (Trades, Portfolio) is Samsung’s second-largest shareholder among the gurus with 252,479 shares in the portfolio. The holding is 0.18% of Samsung’s outstanding shares and 7.13% of de Vaulx’s total assets.

Samsung has a price-earnings (P/E) ratio of 14.16. Its forward P/E is 2.16. A little more than a week after Samsung announced the suspension of its smartphone sales, the company’s P/E was 12.98, its lowest level since July.

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Samsung’s price-book (P/B) ratio is 2.26. Its lowest P/E since before the smartphone and washing machine issues were revealed was 2.07 on Sept. 12.

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The company’s price-sales (P/S) ratio is 1.33.

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GuruFocus gives Samsung a Financial Strength rating of 8/10 and a Profitability and Growth rating of 6/10 with return on equity (ROE) of 8.71% that is higher than 63% of the companies in the Global Consumer Electronics industry and return on assets (ROA) of 6.80% that is higher than 76% of the companies in that industry.

Samsung sold for 1,614,000 South Korean won ($1,456.31 in U.S. currency) per share at market close Tuesday. The DCF Calculator gives Samsung a fair value of 1,208,096.69 South Korean won.

Disclosure: I do not own any stocks mentioned in this article.

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