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Samsung shares jump after Q3 earnings, share repurchase

Samsung's Galaxy S6 edge smartphone.
John Macdougall | AFP | Getty Images
Samsung's Galaxy S6 edge smartphone.

Shares of Samsung Electronics clinched a near six-month high on Thursday, after the South Korean tech giant unveiled a share buyback plan worth $10 billion, alongside a better-than-expected third-quarter earnings report.

The heaviest-weighted stock on South Korea's Kospi index surged as much as 6.4 percent to 1,392,000 won in early trade, hitting its highest level since May 4, but has since narrowed gains to 1.5 percent as of 12pm local time.

"I think the market is pleased with the results and happy to see the company taking steps to clean some of the $52 billion in cash and short-term assets off its balance sheet to the benefit of shareholders," Roger Kay, president and founder at Endpoint Technologies Associates, told CNBC in an email interview on Thursday.

Samsung said on Thursday it plans to buy back and cancel 11.3 trillion won ($9.87 billion) worth of its own shares over the next year to boost shareholder value.

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In its regulatory filings and a statement, Samsung said it will initially buy back 4.2 trillion won worth of common and preferred shares from Friday until January 29 2016 because it believes the company's share prices are undervalued. The company also said it will return between 30 to 50 percent of its annual free cash flow over the next three years, via dividends or share buybacks.

It is also considering paying dividends on a quarterly basis starting next year.

Over the past year, the South Korean tech giant has come under increasing pressure from shareholders to return some of its cash hoard though dividends or share buybacks.

"Samsung continues to believe its stock is undervalued considering it sees itself as a 'unicorn' company in consumer hardware space. Hence, the company has announced a share buyback to stimulate the stock price and [get] investors to value Samsung's stock relative the potential and unmatched scale it brings to the table," said Neil Shah, research director of devices & ecosystems at Counterpoint Research.

Out of the woods?

On the earnings front, Samsung delivered its first year-on-year profit growth in two years on the back of strong chip sales and a pick-up in its smartphone business, suggesting that the tech giant may be getting back on track after a number of weak quarters.

Third-quarter operating profit jumped 82 percent to 7.4 trillion won, compared with its guidance for 7.3 trillion won in early October. Meanwhile, the world's No.1 maker of memory chips and smartphones said revenue rose 8.9 percent to 51.7 trillion won.

The chip division remained the top earner for the fifth-straight quarter, with a record 3.66 trillion won profit. Meanwhile, Samsung's mobile division showed signs of rebound; profit rose to 2.40 trillion won from 1.75 trillion a year earlier, thanks to sales of the Galaxy Note 5 as well as new lower-end products.

This healthy report card indicates that Samsung is well on track for an earnings recovery, according to some analysts.

"The ongoing and growing success of Samsung's component business is not surprising because the company has built a strong presence in several key areas, from chips, display panels, flash memory and more," Bob O'Donnell, founder and chief analyst at Technalysis Research, told CNBC by phone.

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"The improvement in smartphones is a bit more surprising, but even there, the company has been making some aggressive cost-cutting measures and is working from a more realistic perspective on the total smartphone market, so it's not entirely shocking. Thanks to this more realistic viewpoint, as well as the ongoing opportunities in semiconductors and other components, I do think we can expect to see a more healthy Samsung moving forward," O'Donnell added.

To be sure, there are analysts who remain cautious on Samsung's earnings recovery, citing uncertainties in the handset business which has come under pressure recently under waning global demand and cut-throat competition from Apple and Chinese competitors in the low-end market.

"While its chip and display businesses are highly profitable and quite defensible, the phone business remains the opposite. It's not clear that the Android world can sustain its momentum. The company had a decent quarter in phones, but it will have to play each subsequent quarter as it goes so it's too much to say that Samsung is out of the woods," Kay said.

— Reuters contributed to this report