OLED Miscues

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Last week shares of Universal Display (OLED:  Nasdaq) closed down 15.8% on the week.  The price move was a surprise, especially for Universal’s ebullient management team.  The company had reported sales and earnings well above expectations for the fourth quarter ending December 2017, as the market embraces the company’s proprietary energy-saving display technology.  The consensus had been for $0.85 in earnings per share on $100 million in total sales for the quarter. Management delivered.

Sales in the quarter totaled $115.9 million as sales of proprietary PHOLED phosphorescent materials soared.  Net income was $32.8 million or $0.69 per share.  Excluding a one-time write-off of deferred tax assets of $11.5 million triggered by recently enacted tax law changes, net income was $44.3 million or $0.93 per share.

There had been quite a divergence in view on the quarter with sales estimates ranging from $95.8 million to $105 million and earnings estimates ranging from $0.74 to $0.91.   Nonetheless, investors had to recognize that the company had trounced earnings expectations for quarter  –  even the high-end of the range of contributions to the consensus.

Despite this exciting development shares of Universal Display gapped dramatically lower in the first day of trading following the earnings announcement.  Heavy trading volume made it clear that disenchantment was widespread.

In the earnings release management provided guidance for 2018 sales in a range of $350 million to $380 million.  Analysts had already anticipated a significant increase in earnings in the current fiscal year to $3.10 per share on $398.2 million in total sales.  Contributions to the consensus estimate ranged as high as $3.37 in earnings per share on $433.7 million in total sales.  Even the lowest contribution to the consensus estimate of sales was $370.0 million.

Especially following the stellar performance in the fourth quarter, guidance below the current consensus view had a dramatically chilling effect on analysts and investors. As traders listened to management comments during the earnings conference calls, disappointment gathered steam.

Sales for the full year 2017, were $335.6 million, providing $103.9 million in net income or $2.18 per share.  Excluding the effects of the tax asset write-off net income was $115.4 million or $2.43 per share.  Guidance for the quarter appeared to suggest that the pace of market penetration would largely come to a stop.

The tepid guidance appears to have taken analysts and investors by surprise.  The company recently invested $15 million in an Ohio manufacturing facility, doubling commercial production capacity for PHOLED emitters.  If there was any doubt about the chances of filling up new production capacity, it was at least partially dispelled by new evaluation agreements with Royale, Sharp and GovisionX Optoelectronics.  A long-term agreement to supply Samsung Display had recently been extended to the year 2022, and the company had signed a new license and material supply agreement with BOE Technology Group, one of the largest display manufacturers in the world.

All signs have been pointing at continue sales strength.  Investors are now faced with the tough choice of accepting wholesale management’s low guidance or accepting management’s description of strong market penetration activity.  It seems traders have already weighed in on the choice by exiting the stock entirely. There is rarely high tolerance for miscues from management.

The stock sell-off might have been warranted one way or the other.  The trailing price earnings multiple was 63.7 times, based on the stock price prior to the sell-off and earnings adjusted for the deferred tax asset charge.  Following the sell-off the multiple dropped to 53.7 times.  Thus even after the sell-off the stock still appears to be valued on very generous terms.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  OLED was previously included in the coverage group of Crystal Equity Research.  Coverage was concluded with a Sell rating.


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