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Why Samsung Shares Are Headed for Another Bumper Year

Jung Yeon-Je | AFP | Getty Images

The world's largest smartphone maker Samsung Electronics said Tuesday that it had likely hit a record profit of $8.3 billion in the fourth quarter thanks to booming Galaxy sales, prompting analysts to predict a bumper 2013 for shares of the company that have already delivered a stellar performance last year.

Powered by double-digit earnings growth, the Seoul-listed firm's stock price is expected to surge around 50 percent in 2013 after delivering returns of 44 percent in 2012, analysts told CNBC.

Daniel Kim, analyst at Macquarie Securities, has a 12-month price target of 2.3 million won ($2,164) on the stock – 53 percent higher than current levels.

Samsung's operating profit likely rose to 8.8 trillion Korean won ($8.3 billion) in the three months to December, up from 8.1 trillion won in the previous quarter, on bumper handset sales and increased demand for components. And, analysts expect the stellar profit growth to continue into 2013 fueled by robust smartphone demand.

Samsung is forecast to sell 290 million smartphones this year, up 35 percent from an estimated 215 million in 2012, according to market research firm Strategy Analytics. Rival Apple's smartphone sales, by contrast, are expected to hit 180 million this year, up 33 percent from last year.

(Read more: Samsung to Widen Smartphone Gap With Apple This Year: Report)

This will propel Samsung's operating profit to a higher-than-expected 40 trillion won in 2013, up from 29.5 trillion won in 2012 - marking a rise of 36 percent, according to Kim.

"Our investment thesis for Samsung is simple: The market continues to underestimate its earnings power in high-end smartphones and is prematurely calling for peaking margin," Kim said, adding that the company's operating profit margin for premium smartphones currently stands at over 30 percent.

Bryan Ma, associate vice president, client devices, IDC Asia Pacific also expects the solid earnings momentum to continue on the company's attractive product offering.

"I don't expect this to end anytime soon. If you look at Samsung they've been an interesting success story that's continuing to be pushed along by hit after hit products. I expect Samsung to keep moving along in this direction," Ma said, adding that the company's wide range of products in both the low and high-end segments sets it apart from rival Apple.

According to Mark Newman, senior analyst at Sanford Bernstein, who forecasts a 40 percent upside for Samsung's stock this year, the company's components business will also contribute notably to profit growth.

"2012 earnings-per-share (EPS) growth was dominated by handsets, we believe going forward more EPS growth will come from components, particularly semiconductors," Newman said, adding that he expects the market for memory chips to rebound this year.

Samsung is the world's second-largest semiconductor maker after Intel.

Stock Drivers

But, according to Kim growth of Samsung's share in the global smartphone market will be a key driver of the stock this year.

Samsung's global smartphone market share stood at 35 percent in the third quarter of 2012, double that of Apple's at 17 percent. Kim expects Samsung's share will grow to 40 percent this year.

In the near term, he said, "the stock price should gather further upward momentum, once strong first quarter results become visible along with the approaching launch of Galaxy S IV phone (expected in the second quarter)."

From a valuation perspective, Kim said the stock, which is trading at 7 times forward earnings, down from 9 times at the beginning of 2012, also looks attractive.

"The stock price is now cheaper than it was a year ago. The pace of earnings growth has been faster than the share price rise. That's why the rally is not over yet," he said.

Dark Clouds?

Kim, however, warned that there is a major risk hanging over Samsung in the longer term, pointing to the company's reliance on its handset division.

He estimated that the handset division, including the components used to manufacture the phones, accounted for 90 percent of earnings in the fourth quarter.

"This is a long-term concern that Samsung is overly dependent upon one profit source. If Samsung's handset business struggled what would happen to Samsung's share price?" he said.

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