Samsung (XKRX:005930)’s shares retreated due to stronger evidence of short-term weakness in the memory semiconductor businesses as well as the general declines in technology stocks. Historically, the memory business (DRAM and NAND) has been brutally cyclical even though the overall trend has been one of solid growth. While the cyclicality has not been eliminated, we think the current down cycle should be much more benign and fairly short in duration for DRAM, as today only three vendors control more than 90% of the market and all are cutting back on capacity additions. Over time, we see strong growth in the industry, as many of the advances in technology should require huge amounts of memory semiconductors.
We think Samsung’s shares have far overreacted to the down cycle and the valuation makes it an exceptional investment opportunity, and made additional purchases during the quarter on the price declines. Samsung’s preferred shares represent one of the least expensive investments in a high-quality large company we have ever seen, selling below book value and having more than half of the market cap in net cash/investments/hidden assets. While earnings will be weaker in 2019, the stock trades at less than three times our expectations for this year’s earnings after subtracting the excess assets not required to produce the profits.
From Yacktman Fund (Trades, Portfolio)'s fourth quarter 2018 shareholder letter.
