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Samsung shares on fire as earnings recovery gets underway

SeongJoon Cho | Bloomberg | Getty Images

Shares of Samsung surged on Wednesday after the South Korean technology giant's third quarter earnings guidance blew past expectations, suggesting the company is getting back on track after a number of weak quarters.

The company estimated its third-quarter profit rose 79.8 percent on year to 7.3 trillion won ($6.29 billion), its first quarterly profit gain in two years and its biggest since the first quarter of 2014. This compares with 6.7 trillion won forecast by analysts in a Reuters poll.

It also expects its third-quarter revenue to have risen 7.5 percent from a year earlier to 51 trillion won. The firm will report its full results in late October.

Investors cheered the guidance, sending Samsung's stock soaring 8.7 percent to 1.251 million won, their highest since late July.

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"It's a very pleasant surprise, this is much stronger than consensus. That clearly shows Samsung's earnings recovery is well on track," said Daniel Kim, analyst at Macquarie Equities Research.

Kim pins the earnings surprise on two factors: higher-than-expected margins for the company's display panel business as well as stronger-than-expected shipments of premium smartphones Galaxy Note 5 and Galaxy S6 edge plus in September - a welcome development for the company's mobile division which has been struggling in the face of waning global demand and intensifying competition from Apple and low-cost manufacturers.

Outlook brightens

As Samsung's earnings recovery gets underway, Kim expects the company's full year earnings will exceed last year's number.

However, this is largely on account of the company's semiconductor division, which is "booming" at the moment, he said. The company's chip division has become an increasingly vital part of the business amid the slowdown in smartphone sales.

Samsung's mobile business booked a 38 percent decline in April-June operating profit at 2.76 trillion won. On the bright side, Samsung's chips division reported profit of 3.40 trillion won, its highest since the third quarter of 2010, due to demand for memory chips and sales growth in mobile processors.

Kim, who has a 12-month price target of 1.5 million won for the stock, sees a couple of key drivers for Samsung shares in the coming months.

"There is a growing hope in the market that shareholder friendly capital management policies will be unveiled soon from Samsung management," he said.

Samsung has come under increasing pressure from shareholders to return some of its $55 billion cash hoard though dividends or share buybacks.

"Investors are getting excited about both fundamentals and potential share buyback plans."

-Reuters contributed to this report