Why are market bulls sticking by Samsung?

What Samsung needs to work on
What Samsung needs to work on

An ugly earnings report from Samsung Electronics prompted a 3 percent drop in its shares on Thursday, but that hasn't deterred market bulls who seem unfazed by the weakening mobile division at the South Korean electronics giant.

The company reported a 24.6 percent fall in second-quarter operating profit to 7.2 trillion ($7.03 billion) from a year ago, putting the company on track for its first annual profit decline in three years.

Its all-important telecom division saw income slump an annual 30 percent to 4.42 trillion won, as the company struggles to keep its grip on the smartphone market in the face of stiffening competition from low-cost rivals in China.

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Still, many analysts CNBC spoke to shrugged off the grim results, citing optimism stemming from three areas: expectations for the company to return more of its near $60 billion cash pile to shareholders, strength in its chip division and its continued dominant position in the smartphone market.

"Global investors are pressuring the company to raise its dividend, buy back shares. Samsung Group is currently undergoing corporate restructuring, after that hopefully they will initiate better capital returns to be on par with [peers] like Apple," Nam Hyung Kim, managing director at Arete Research Asia told CNBC.

Samsung's dividend payout ratio – or how much of its earnings it pays out in dividends – is around 7 percent for the past 12 months, according to Thomson Reuters data, compared with Apple's 29 percent.

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Kim has a 12-month price target of 1.7 million won for the company's stock - a 25 percent rise from current level of 1.37 million won. Samsung shares have fallen 0.4 percent so far this year, after recording a loss of 9.9 percent last year, marking the first annual decline since 2008.

According to Mark Newman, senior research analyst at Sanford C. Bernstein, the increasing strength in Samsung's semiconductor business should help drive earnings growth going forward.

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The conglomerate has a diversified business selling semiconductors, flat screen TVs and home appliances in addition to its mobile division which accounts for around two-thirds of the company's total profit.

"We believe that long term, Samsung is one of the few survivors in semiconductors and will continue to grow semiconductor earnings particularly in memory," Newman wrote in a report published after the company released its preliminary earnings guidance earlier in the month, where he reiterated his 12-month price target of 2 million won for the stock.

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"The memory business should account for an increasing part of operating profits going forward," he said.

Despite the weakness of Samsung's mobile division, Newman argues that the firm should be able to sustain margins in its smartphone division better than its competitors given the vertically integrated nature of the company.

Samsung on Thursday revealed plans to launch two new high-end smartphone models within the next six months – one model will have a large screen while the other will be built using "new materials." It also plans to introduce new models in the mid-to-low end segment with enhanced specifications.

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Still, Newman believes the most immediate impact for Samsung's stock is going to be what it does with its cash hoard.

"Although Samsung's valuation is cheap, we expect shares to remain choppy until we have improved visibility around cash returns," he said.