US Tariffs And Chinese Competition Will Compress Margins

Key Takeaways

• Rising trade barriers, input costs, and supply chain issues threaten profitability and create uncertainty in LG's long-term earnings outlook.
  
• Intensifying digital ecosystem competition and aggressive rivals risk eroding LG's hardware demand, market share, and pricing power.
  
• Diversified growth in high-margin sectors, premium innovations, and resilient global operations are positioning LG Electronics for sustained revenue and margin expansion amid global risks.

Catalysts

Manufactures and sells consumer and commercial products worldwide.

• Intensifying trade barriers and ongoing global protectionism, particularly new US tariff measures and geopolitical instability in Europe and the Middle East, are driving up LG Electronics' compliance and logistics costs, which is expected to erode net margins and put long-term pressure on earnings as cost structures become less predictable.
  
• The accelerating move by consumers toward integrated software and digital ecosystems from major technology players such as Apple, Google, and Amazon is likely to displace demand for LG's hardware-centric home electronics, reducing revenue growth opportunities and weakening pricing power over time.
  
• Rapid advancement and ultra-competitive pricing from Chinese manufacturers like Hisense, TCL, and Haier are directly threatening LG's market share in both developed and emerging markets, leading to further margin compression and increased risk of revenue stagnation despite attempts to penetrate new regions.
  
• Ongoing supply chain disruptions, rising input costs-especially for semiconductors, LCD panels, and rare earth materials-and continued FX volatility are expected to weigh heavily on operating profit, offsetting any productivity gains from internal efficiencies and making sustainable profit growth increasingly difficult.
  
• Scaling R&D and marketing investments in smart/IoT product development and subscription platforms presents a risk that these initiatives will fail to achieve material returns, resulting in higher capital allocation with diminishing impact on long-term revenue and cash flow, especially if premium segment demand slows or competition in digital services intensifies.

LG Electronics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LG Electronics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LG Electronics's revenue will grow by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 1.1% in 3 years time.
• The bearish analysts expect earnings to reach ₩1098.5 billion (and earnings per share of ₩6703.2) by about June 2028, up from ₩854.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from 15.5x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 10.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.22%, as per the Simply Wall St company report.

LG Electronics Future Earnings Per Share Growth

Risks

• LG Electronics is achieving record high sales and operating profits in key growth segments such as automotive electronics, HVAC, and B2B subscription services, driven by ongoing portfolio transformation, which bodes positively for long-term revenue growth and margin expansion.
  
• The company is successfully expanding its premium product strategies and launching market-specific models in emerging regions, leveraging growth in online and subscription businesses, supporting both revenue and profitability trajectories.
  
• Strategic partnerships, such as with Microsoft for WebOS and AI TV innovations, are enhancing LG's competitive value proposition by adding high-value features, which could enable premium pricing and improved earnings quality going forward.
  
• The ES (Energy Solutions) business is accelerating its expansion in data center cooling and energy-efficient systems, achieving robust growth and establishing a high-margin product mix, setting a clear foundation for future sales and operating profit improvement.
  
• LG's resilience to global trade and tariff risks is underpinned by its extensive global production network and flexible supply chain strategies, allowing the company to optimize production, control costs, and defend operating margins despite macroeconomic and geopolitical headwinds.

Valuation

• The assumed bearish price target for LG Electronics is ₩75279.56, which represents two standard deviations below the consensus price target of ₩102840.0. This valuation is based on what can be assumed as the expectations of LG Electronics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩130000.0, and the most bearish reporting a price target of just ₩75000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩96970.1 billion, earnings will come to ₩1098.5 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of ₩73800.0, the bearish analyst price target of ₩75279.56 is 2.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.