Bernstein Research analyst Mark Newman put out a note to his clients earlier this week maintaining his 'Outperform' rating on Samsung's stock. Newman notes that while the Samsung Galaxy S4
has a lower gross margin than the Samsung Galaxy S III
, the operating margins between the two phones are roughly the same. How can this be? It's because the newer model eats more home-cookin' than its predecessor. In other words, more parts in the newer flagship phone come directly from Samsung
Newman's math reveals that while 64% of the Samsung Galaxy S III used Samsung parts, 68% of the Samsung Galaxy S4's parts come directly from the Korean manufacturer. Those extra percentage points represent money flowing to Samsung's bottom line. That should more than make up for the 2% difference in gross margin between last year's model (48%) and the soon to launch new model of the phone (46%). That calculation is based on an average selling price of $520 for both handsets.
"We estimate that, while 53% of Galaxy S3 BOM cost was internal, 58% of Galaxy S4 BOM costs should now flow through Display/Semis (Memory & S.LSI). We estimate that, while 64% of Galaxy S3 BOM cost was within the Samsung Group (i.e. SEMCO, Samsung SDI, etc.), 68% of Galaxy S4 BOM costs should now flow through the Samsung Group. Additional profits to Samsung group entities should benefit Samsung Electronics in the form of increased equity income."-Mark Newman, Bernstein Research
Newman also points out that with 10 million units of the Samsung Galaxy S4 being produced each month, the OEM is churning out more phones monthly than Bernstein had estimated. Overall, the analyst says that "We believe the Galaxy S4 positions Samsung Electronics for continued strong earnings growth this year