Samsung Electronics, the world’s largest integrated consumer electronics manufacturer, reported good Q2 results driven by strong Galaxy S7 smart phone sales, improvements in the consumer electronics segment, and the expectation that memory circuit sales (DRAM & NAND) are recovering from a cyclical low point. Samsung even surpassed Apple in US smart phone market share, a strong indication that consumers love the S7.

While investors remain overly focused on smart-phones, we feel that they fail to notice Samsung’s many other highly valuable business segments (DRAM, NAND, chipsets, displays, digital cameras, television sets, tablets, laptops, networking equipment and home appliances) as well as its competitive moat. Thanks to its size, Samsung enjoys low manufacturing costs (economies of scale) and high bargaining power with suppliers. To put its size in perspective, Samsung sells twice as many smartphones as Apple. Samsung gains additional competitive advantages from its vertical integration, with internal production of many of its own chipsets, memory circuits, and displays.

The consumer electronics space continues to expand with new product categories emerging that did not even exist a few years ago such as house cleaning robots, smart watches, virtual reality headsets, personal fitness trackers, personal health monitors, Internet connected home appliances and more. Samsung is already leveraging its size and competitive advantages to become a leading supplier in all of these categories. Needless to say, all these devices will also require chipsets and memory components that Samsung will supply. Over the years Samsung has created tremendous shareholder value and will continue to do so in the future.

Samsung is cheap by any valuation metric. It trades for 9x earnings, 95% of book value, and 3.5x EV to EBITDA based on our expected 2017 results. At the current stock price, we are paying fair market value for the non-smart phone businesses and essentially getting the smart-phone business for free.

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The above commentary has been excerpted from a letter to clients of Emerging Value Capital Management.

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