Bernstein Research’s Mark Newman yesterday cut his rating on shares of LG Electronics (066570KS) from Market Perform to Underperform, cutting his price target to 60,000 Korean Won from a prior ?80,000, writing that a 67% increase from the end of August is banking on an optimistic outlook for handset sales that may be unrealistic.
LG on February 1st posted the first quarterly profit in handsets after a year and a half of losses, as reported by Bloomberg’s Miyoung Kim.
Newman thinks the quarterly improvement is just from holding off on being aggressive in pricing, and he doesn’t think it will last:
LGE has chosen the path to sacrifice handset market share for short term profitability, which is a vicious cycle of declining scale and competitiveness making it increasingly unlikely that LGE can reap significant profits in handsets again. We are not optimistic that LGE can improve handset profitability or share going forward [�] Although we have LGE’s smartphone share slightly increasing back to 4.5%, their overall handset share is falling substantially from ~12% in 2009 to 6.3% in 2011 and ~4% in 2012, due to their retreat away from low-end feature phones.
Moreover, other, newer business lines are dragging down LG’s profit:
Other businesses include: solar, optical storage drives, water treatment and energy components. These businesses together generated KRW 165 Billion in losses in Q4’11, without which LGE’s operating profit would be 8 times higher. We believe the majority of these losses were from solar.
Newman estimates LG’s revenue this year at ?55 trillion, with EPS of ?2,956 per share. That is below the Street consensus of ?57 trillion and ?4,605.
LG Electronics shares fell 1% in Seoul trading to ?90,100.
Fin.
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