LG Electronics: sales growth shortfall Premium

Not quite the back-to-black story the South Korean tech giant is promoting

It is a short trip from tech sector darling to doghouse. Just ask LG Electronics. Now the South Korean technology giant that isn’t Samsung hopes to please with an analyst estimate-beating return to profit. That is a start, but the company will have to work much harder to match its larger rival in investors’ eyes.

LG’s bottom line makes the turnround appear strong. The group returned to earnings of Won243bn in the first quarter improving on full-year losses in 2011. But this is not quite the back-to-black story the company is promoting: sales dropped a tenth from last quarter and 7 per cent from this time last year. The return to profit was the result of (admittedly welcome) margin improvements. Applying this year’s operating margins to the fourth quarter of 2011 would have nearly trebled full-year operating income – and the turnround in investment income now covers debt payments.

Cost-cutting (and a fair market wind from improvements in investment income) are one thing, sales growth, however, is where LG still pales. Samsung used to average 1.8 times LG’s sales. Over the past five years it has widened that to three times. And it is not just the top line. Samsung’s operating margin has averaged double LG’s over that time too. LG of course is a turnround story. Profits this quarter are based on cost control and a better mix of high-end smartphones and 3D televisions. Now, sales must pick up. This is certainly possible given its new models and rising interest in 3D TVs.

LG trades at a forward price-to-earnings multiple not far below Samsung’s. This would suggest its earnings recovery is priced in, yet relative to sales, LG, at 0.4 times, is far short of Samsung’s 1.4 ratio. Investors confident in LG’s top-line story might like to bet that combined with its better margins, it can indeed return to darling status.

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