If the tablet and smartphone markets were a horse race, you’d see nags named BlackBerry, Nokia and HTC circling the track. But it’s really a two-horse contest and they are called Apple and Samsung.
Among smartphone sales, Samsung’s Galaxy models overtook Apple’s iPhones in 2011 and now Samsung is looking to grab tablet market share, also. Apple is trying to turn around its fortunes with its latest iPad Air.Samsung’s margins have been improving, but its latest watch product (an attempt to innovate) has not been a success.
Both companies have strong balance sheets and a good line of products and seem to be leaving Blackberry, Nokia and HTC in the dust. For now, Samsung seems to have the slight edge, and Apple more than ever needs to show its innovative capability in order to keep its market share.
Source: Eikon
Apple’s erratic margins
One concern for Apple is falling margins. As you can see in the chart above, Apple’s margins fell for several quarters, from close to 40% in March 2012 to 26% in June 2013. Part of the reason for the falling margins was that Apple did not have many major releases in the last year, until it came up with the iPhone 5S and the 5C. That release helped lift margins slightly to 26.8% in the last quarter. The margin decline may finally be arrested, and the release of the iPad Air may help lift margins again. Contrast that with Samsung’s margins, which have been improving steadily as can be seen in the chart below.
Source: Eikon
Good cash flows for both
Both Apple and Samsung have been generating strong cash flows from operations and have a strong balance sheet. Both Apple and Samsung have strong earnings quality based on the StarMine Earnings Quality (EQ) model scores of 92 and 96, respectively. That indicates that the earnings are coming from sustainable sources and are likely to remain strong going forward. For the other smartphone manufacturers, however, the future does not look too bright.
Source: Eikon
Surveying the field
Nokia, once a dominant cell phone player, struggled with weak margins (as can be seen in the chart below). However, the last couple of quarters have been encouraging. Nokia seems to have seen a small turnaround with operating margins improving over the last two quarters, on the back of the successful Lumia line of phones. However, it is still not in a position to be a serious threat to Apple and Samsung yet. Analysts have taken note of this turnaround and have been bullish on Nokia earnings, raising full-year earnings estimates by 37% over the last 90 days. They have raised next year’s earnings estimates by 57%. Just 90 days ago there were nine sell and strong sell estimates for the company, now there are none. The company scores a strong 98 on the StarMine Analyst Revisions Model (ARM) which indicates likely continued analyst bullishness.
Source: Eikon
BlackBerry’s struggles
BlackBerry on the other hand has seen a drastic decline in fortunes. As you can see from the StarMine models below, the company scores poorly on almost every metric. It looks like potential suitors may be scared away by its poor performance. Blackberry operating margins and poor cash flows show that the company is really struggling to remain relevant.
Source: Eikon/StarMine
Keep watching the track
It looks like Samsung and Apple have really cornered the smartphone market at the expense of HTC (for more details on HTC see this story), Blackberry and Nokia. Apple has finally seen its margins stabilize and will be dependent on new product innovations to continue to push margins higher. Samsung is in the same position, and both companies are generating large amounts of cash which means that they are well positioned to invest that money in research and development and pay back investors in the form of dividends and stock buybacks. One thing is for sure — both thoroughbreds are still straining for the winner’s circle.
Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter or check out the Eikon blog. If you are looking to access our data or analytics, register for a free trial.
