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October to December marks the first quarter (Q1) of Apple Inc.’s financial year. Q1 has historically been the best of the four quarters for Apple, as consumers rush to buy the new generation of iPhone announced in September, which generally finds availability in the Oct to Dec quarter. Q1 2017 appears to be no different from previous years with the launch of iPhone 8, 8 plus and X expected to translate to record revenues for the company. Smartphone sales are the most meaningful contributor to revenue accounting for between 65% and 70% thereof. The company does not however break down its profits by segment. The group has guided that it expects to achieve record revenue for the quarter of between $84bn and $87bn, which would be between 7.5% and 11.5% higher than the previous record quarter (Q1 2016).
Apple Inc remains an extremely cash generative business and returns capital to investors through mainly the repurchasing of shares in the open market and to a lesser degree through dividends. This capital return program promised by Apple is to be $300bn up until May 2019, of which $225bn has already been bought / paid over the last few years. The company currently trades on a historical Price to Earnings (P/E) ratio of around 18 times and Dividend Yield (DY) of 1.48%.
October to December marks the Fourth quarter (Q4) of Samsung’s financial year. Smartphone revenue accounts for around 44% of group revenue but only around 22% of the groups operating profit. This division is expected to continue to do well this quarter on the back of seasonality and demand for the recently released Note 8 (as well as demand for the slightly older models S8, S8 plus and J models). It is however the Devices Solutions business which is now the most meaningful contributor to both revenue (45%) and operating profit (74%) for Samsung. This division comprises of the Semiconductor and display panel businesses and is expected to continue benefitting from tight supply and strong demand conditions for the current quarter and certainly into the next financial year. Consensus estimates from surveyed analysts by Bloomberg, suggest revenue for the quarter to be a record breaking $60.583bn for Samsung, around 31% higher than Q4 2017 which was also a record breaking quarter.
Samsung (like Apple Inc) is an extremely cash generative business returning capital through both share buybacks and dividends as well. The company has embarked on a $8.5bn (9.3tn KRW) share buyback this year with the final phase of repurchasing ($2.3bn remainder) having commenced 1 November and expected to complete in January 2018. Samsung currently trades on a historical P/E ratio of 10.5 times whilst offering a DY of around 1%.
There is no doubt that both companies would represent high quality holdings in any portfolio. Both are in the midst of what appear to be record breaking quarters in revenue and earnings, proving that these businesses both remain in a strong growth phase. The dividend yield offerings for both companies’ is relatively negligible (for now), although capital value is being added by share buyback schemes currently underway.
Samsung does however trade at a less demanding earnings multiples. The company also looks to realise stronger year on year growth than its US competitor. The groups high growth, high margin semiconductor (memory and display panels) business is expected to continue to reap the rewards of high / increasing demand and Samsung’s superior production ability over its competitors. Mobile devices shipments are a low margin business (relatively speaking) in terms of Samsung earnings, although volumes remain strong with the company still shipping by far the most units worldwide. Even the success of iPhone X sales will translate to increased Samsung revenue as the company manufactures (almost exclusively) the OLED (Organic Light Emitting Diode) screens for Apple.
So for now, while both companies’ continue to be of the highest quality and make a healthy technology addition to a portfolio, perhaps Samsung at current levels is offering the better value entry opportunity.