Universal Display Corp (NASDAQ:PANL) announced earnings after market close on May 9. Revenue topped expectations, but net earnings were still in line at a 10 cent per share loss. The call provided some of the information I'd said to look for in my previous article, and a surprise as well. This article will update the outlook based on new info, as requested by several followers.
The most important point was the sales of green emitters relative to red. I was hoping for a high percentage of green to red, but management disclosed that green emitters actually exceeded the sales of their red counterparts. Furthermore, reviews for the Galaxy S IV screen, which use this material, have been very positive. This news completely validates UDC's green emitter material and means we can essentially discard the Worst Case scenario, at least for the next year or two. Meanwhile, the prospects for the Optimistic Scenario continue to improve, with the following data points:
- Samsung launching their own 55" OLED televisions in June.
- Increasing mobile display production from LG, AUO and Samsung.
- Impending adoption of flexible display technology.
- continuing progress on blue emitters.
The two reasons why red sales declined, according to management, were cumulative volumes discount and improved utilization. The red emitters have been in use much longer and increased usage efficiency was expected. The volume discount was a new bit of info on the Samsung contract, though, and it seems to have caught many analysts by surprise. I was modeling a margin decline with increasing sales, though I had only built it into my Optimistic Scenario. We can assume that both factors will eventually come into play with green emitters too, so the updated Median Scenario looks like this:
|Yearly Material Revenue (300m x .40)||$120m|
|+ Licensing Revenue||$40m|
|- Operating Expense (75% emitter margin)||$95m|
|= Net Earnings||$65m|
|/ 46.2m shares x 25 PE||$35.17/share|
As mentioned in the first article, Universal Display badly needs a second commercial volume customer. The Q&A of the earnings call gives some hope that this is coming; management said:
[The increase in Display Licensing revenue] is in customers that when we sell we include a license fee into the material price, so it not be related to Samsung but will be related to most of our other customers.
This indicates to me that interest is alive and well at companies beyond Samsung, and PANL stands a good chance of eventually reaping benefits from the increased OLED production planned by other display manufacturers. Nonetheless, we should not count on this yet, and in particular, we should be wary of a good cop/bad cop scenario from chaebol customers Samsung and LG. These two, while competitors in the sales market, still both operate under the Korean government and are very capable of cooperating covertly to play suppliers against one another.
PANL is an excellent speculative buy, particularly on dips, since recent developments have minimized the downside. Even though things seem to be proceeding according to plan, however, investors need to continue to monitor the factors mentioned in previous articles in order to see whether or not the company can realize its potential of several times the current share price. Like any good spaghetti western, the plot is likely to hold a few more twists and turns, but diligent investors may yet find their just reward.
Disclosure: I am long PANL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.