Why LG Display Could Be Playing With House Money
Summary
- LG Display posted better than expected quarterly numbers for the third straight time, although there were a lot of external factors that muddied the true picture.
- The company continues to benefit from changes brought about by COVID-19, but that could start to change as time goes by.
- LPL appears to be undervalued in some ways, which could attract the attention of those looking for a bargain in today’s market.
- Multiples for LPL may seem low, but they don’t tell all there is to know about the issues confronting LPL.
LG Display (NYSE:LPL) got off to a good start numbers-wise with the release of the Q1 2021 earnings report. The Q1 report comes after the Q4 report, which makes for tough comparisons due to seasonal factors. The Q1 report was therefore not expected to be as good as the Q4 one, but the latest numbers were nevertheless better than expected. However, they got overshadowed by revelations that the good times at LPL may not be here to stay. Why will be covered next.
The Q1 2021 report benefited from favorable conditions
It’s true that the Q1 report follows the Q4 report and that makes for tough comparisons. The December quarter is the holiday season, which means consumer buying is elevated compared to the rest of the year. Sales of many consumer goods are higher than normal, which helps boost the numbers from LPL as a manufacturer of display panels for products like TVs, smartphones and so on. All goods that fly off the shelves during the holidays.
On the other hand, the Q1 2021 report comes exactly one year after COVID-19 exploded onto the scene. The pandemic had a major impact on the Q1 2020 numbers for obvious reasons, but it also had another indirect consequence. It lowered the bar, allowing for easier comparisons. This effect can be seen in the table below.
Q1 revenue declined by 8% QoQ, but they increased by 46% YoY to KRW6,883B or $6.14B using the current exchange rate. Net income went from minus KRW199B a year ago to plus KRW266B or $0.24B. Nevertheless, Q1 net income did decline by 57% in comparison to Q4.
(Unit: B KRW) | Q1 2021 | Q4 2020 | Q1 2020 | QoQ | YoY |
Revenue | 6,883 | 7,461 | 4,724 | (7.75%) | 45.70% |
Operating income (loss) | 523 | 685 | (363) | (23.65%) | - |
EBITDA | 1,620 | 1,774 | 631 | (8.68%) | 156.74% |
Net income (loss) | 266 | 621 | (199) | (57.17%) | - |
Source: LG Display
The numbers for Q1 2020 were much worse than they would have been if not for the pandemic. The YoY comparisons are therefore a bit misleading since they give off the impression that LPL is doing much better than it really is. Still, there’s no denying that there was growth at LPL even if all the noise is stripped out.
For instance, Q1 revenue increased by 17% in comparison to Q1 2019, which shows that Q1 2021 did not only benefit from favorable comparisons since there was no pandemic back then. There was some real underlying strength in the Q1 2021 numbers. The table below shows recent quarterly numbers from LPL. Note that LPL has posted three consecutive quarters with a net profit after finishing with a net loss for six consecutive quarters. There has been quite a change since the start of the second half of 2020. Whether that will continue remains up in the air.
(Unit: B KRW) | Revenue | Operating income | EBITDA | Net income |
Q1 2021 | 6,883 | 523 | 1,620 | 266 |
Q4 2020 | 7,461 | 685 | 1,744 | 621 |
Q3 2020 | 6,738 | 164 | 1,288 | 11 |
Q2 2020 | 5,307 | (517) | 413 | (504) |
Q1 2020 | 4,724 | (362) | 630 | (199) |
Q4 2019 | 6,422 | (422) | 586 | (1,817) |
Q3 2019 | 5,822 | (436) | 613 | (442) |
Q2 2019 | 5,353 | (369) | 458 | (550) |
Q1 2019 | 5,879 | (132) | 679 | (63) |
Q4 2018 | 6,948 | 279 | 1134 | 153 |
The good and the bad for LPL in Q1
The table below shows how many display panels LPL shipped and what they were worth. LPL shipped 8.5M square meters at an average selling price of $736. Both are a step below Q4, even though there was more capacity available. IT panels accounted for 40% of revenue, TV panels another 31% and mobile the remaining 29%. The last segment declined by 5% QoQ, which is not surprising as sales of smartphones tend to peak during the holiday season.
Strong demand for TV and IT products helped offset seasonal weakness elsewhere, thanks in large part to changes brought about by COVID-19 like stay at home. This trend has helped increase demand for certain consumer items that people require in order to make themselves more comfortable at home. For instance, LPL shipped 1.6M units of OLED TVs in Q1, which is on par with Q4.
Capacity (M m²) | Shipment (M m²) | ASP/m² | |
Q1 2021 | 11.2 | 8.5 | $736 |
Q4 2020 | 10.8 | 8.7 | $790 |
Q3 2020 | 10.8 | 8.3 | $706 |
Q2 2020 | 9.3 | 6.7 | $654 |
Q1 2020 | 9.7 | 7.0 | $567 |
Q4 2019 | 10.6 | 9.2 | $606 |
Q3 2019 | 13.0 | 9.5 | $513 |
Q2 2019 | 13.2 | 9.9 | $456 |
Q1 2019 | 12.9 | 9.8 | $528 |
LPL sees possible headwinds ahead
LPL had mostly good things to say up to this point, but the outlook was something else. Guidance calls for Q2 area shipments to increase in the mid to high single digits QoQ, offset by a decrease in ASPs in the mid to high single digits. The YoY comparisons should look better since the base is low in Q2 2020. However, management is also leaving room for some downside due to the current shortage of semiconductor chips. From the Q1 earnings call:
"In Q2, solid demand is expected for large panels like TV, monitors and notebook PCs. Area shipment will grow by mid- to high single-digit Q-o-Q, while ASP is expected to fall by mid- to high single digit, feeling the impact of reduced mobile shipment due to seasonality. But our actual performance is subject to market circumstances, especially given the risk of cost increase coming from the part supply issue such as semiconductors."
A transcript of the Q1 2021 earnings call can be found here.
LPL is leaving open the possibility that some of its customers could be faced with supply chain problems. To be more specific, some of the manufacturers LPL does business with may be confronted with insufficient supplies of certain semiconductor chips. These manufacturers may have to lower production, which means that fewer display panels from LPL could be needed as a result.
As if that wasn’t enough, LPL sees other headwinds ahead. LPL has benefited from changes induced by COVID-19 such as work from home and stay at home as mentioned earlier, but those may start to fade in the second half of 2021.
"Notably, in the second half this year, we anticipate changes in people's consumption patterns following vaccination campaigns and the subsequent improvement in the COVID situation. In particular, changes in people's lifestyle such as growing outdoor activities, could lead to changes in product demand. The company will closely monitor changes in market trends and strengthen our readiness."
Major markets like the U.S. and Europe could achieve herd immunity sometime later in 2021, assuming the current rate of vaccination is maintained. If that happens, life could begin to resemble pre-COVID, which means that LPL may no longer be able to count on extra sales thanks to COVID-19 like it has recently.
Why some may want to take a shot at LPL
If there’s one reason why someone may be interested in LPL, then it probably has something to do with multiples. For instance, LPL revenue and EBITDA in the last twelve months was KRW26,389B or $23.54B and KRW5,095B or $4.54B, respectively. If LPL has a market cap of about $7.75B, then the company is valued at just 0.33 times sales.
However, LPL also has a lot of debt. Total debt stands at KRW14,309B or $12.76B, partially offset by KRW4,352B or $3.88B in cash. LPL has an enterprise value of approximately $16.6B after accounting for debt and cash, which is equal to 3.66 times EBITDA. These multiples seem very low, perhaps even too low, for a company like LPL.
Low multiples have helped LPL outperform at a time when many stocks trade at lofty valuations. The stock has gained 26% YTD in 2021, even though the stock has lost 12% since LPL released its most recent quarterly report. To put this in perspective, the SPDR S&P 500 (SPY) has gained 12% in 2021. Note, however, that all the gains have come in January. The stock has gone flat since then. The chart below shows how LPL has done recently.
Investor takeaways
The turnaround at LPL that started in Q3 2020 continues to roll forward. While the Q1 2021 numbers were not as good as the previous quarter as expected, they were nonetheless much better than expected. LPL got off to a rough start when the pandemic broke out, something that can be seen in the quarterly numbers from the first half of 2020. But since then, the pandemic has paid dividends by boosting sales of certain consumer goods than contain display panels from LPL. Unprecedented fiscal and monetary stimulus globally deserves mention.
LPL has been in the black for three straight quarters after coming off a streak of six consecutive quarters with net losses. The primary reason why LPL struggled at that time was due to stiff competition in the market for display panels. There was an oversupply of display panels, which pushed down prices and hurt display manufacturers like LPL. A previous article delves deeper into these issues affecting the display market.
The pandemic has boosted demand for products like TVs, laptops and desktop monitors, easing supply and demand and putting the display market on a more solid footing. However, the question that comes to mind is what will happen if or when the pandemic goes away. It’s natural to assume that people will not want to live the way they had to during the pandemic. That means they will not want to stay at home as much, implying there’s less of a need for TVs and so on.
It’s quite possible that demand for display panels will taper off as the year progresses. Vaccines may be in short supply at the moment, but it’s only a matter of time before there are enough vaccines for everyone on the planet. Demand for display panels could fall even faster if companies are unable to source enough semiconductor chips for their products and are forced to cut production.
While LPL continues to do well right now, management has reasons to be concerned about what lies ahead. The sales boom of pandemic-related consumer goods will not last forever. There’s also the unresolved issue of too much capacity in the display industry. That issue may have faded into the background during the pandemic, but it’s still out there and could resurface at some point to cause problems like it has in the not so distant past. A previous article covers this aspect in further detail.
I am neutral on LPL, even though long LPL has its merits. Multiples look attractive in today’s market where many companies trade at sky-high valuations. LPL with an enterprise value of less than four times EBITDA is like a breath of fresh air. Earnings growth has been strong lately, even if you strip out the effects of seasonality and COVID-19.
Having said that, LPL faces an uncertain future. COVID-19 did not really solve the problems that plagued LPL and the display industry as a whole before the pandemic hit. COVID-19 simply provided a temporary relief to make the pain go away. The problem of excessive competition due to display manufacturers having much more capacity than is needed is still out there. LPL may have posted good numbers, but it’s anyone's guess how long that will last. The good numbers from LPL for the last three quarters may have just been a case of playing with house money courtesy of the COVID-19 pandemic. That simply will not last.
This article was written by
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