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This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
It's always sad when bad things happen to good analysts, and yesterday was especially sad for Canaccord Genuity. Long a steadfast defender of "organic light emitting diode" (OLED) specialist Universal Display (Nasdaq: PANL  ) , Canaccord couldn't take the pain anymore after yesterday's disastrous earnings announcement. Seeing UD report a larger than expected loss, and watching the stock crumble 18% in response, the analyst's nerve finally cracked -- and it closed out its "buy" rating.

It was a sad day for Universal Display (UD), a longtime recommendation of our own Motley Fool Rule Breakers team. But it was also a sad day for a great analyst. According to our CAPS stats, Canaccord Genuity currently ranks among the top 5% best investors on the planet. It's Universal Disappointment notwithstanding, it's performed particularly well in this stock's home Electronic Equipment, Instruments and Components industry, racking up big wins at FARO Technologies (Nasdaq: FARO  ) and Trimble Navigation (Nasdaq: TRMB  ) en route to a market-thumping 62.5% accuracy record. So what went wrong at Universal Display?

Universal disappointment  
After all, as Canaccord itself admits, UD actually outperformed analyst predictions for revenues in Q1. So it appears the growth thesis here is still intact. The trouble was with ...

  • earnings. UD's $0.31-per-share loss exceeded consensus estimates by a factor of 10.
  • guidance. "Delays in Samsung's Gen5.5 fab" could delay UD collecting additional revenues from its partner by as much as a year.
  • and guidance again. Canaccord worries that Samsung might play hardball with UD over royalty rates on UD tech, raising the potential that UD will "temporarily walk away from" a customer that currently provides more than 70% of its revenues.

I shudder to think how investors might react to that last development, if it comes to pass. Universal Display already has no profits on which to hang a valuation, nor even any free cash flow. Take away its revenues, too, and the stock becomes an exceedingly dicey proposition ...  

Universal optimism
All that being said, and despite downgrading the stock today, Canaccord remains optimistic about Universal Display over the very long term. In fact, at the same time as it ratcheted down its rating, Canaccord upped its price target on the stock -- to $52.

Why? The analyst looks past UD today with its 1% royalty from Samsung, and envisions a day when UD will be able to wring 2% royalties from its major customer. Ultimately, Canaccord believes UD will be able to earn $5 per share some five years from now, and argues the stock is worth at least a 10x multiple to those future earnings -- a price it's willing to pay today.

Well ... maybe not entirely universal
Me, I'm not so sure. The problem with investing on the bleeding edge of tech is that the future's incredibly hard to predict. Case in point: 3-D television. It was supposed to be a big sales driver last year, right? Ask Best Buy (NYSE: BBY  ) how that worked out for them. (Hint: Sales were down 2% last quarter.) Investors who were gambling on a surge of consumer spending on fancy new 3-D sets to drive profits higher at Corning (NYSE: GLW  ) , which makes the LCD TV glass, or Dolby (NYSE: DLB  ) , which does the sound systems, suffered similar let-downs.

Meanwhile, TV tech continues to evolve at a frightening rate. Maybe Canaccord's right and OLED television displays are the next big thing (and hopefully bigger than 3-D.) Maybe not. What I do know is that right now, shares of Universal Display fetch a sky-high price of 60 times annual sales, versus consensus analyst estimates of 40% long-term earnings growth at the company. Put another way, if UD could wave a magic wand and instantly turn 100% of its revenues into profits -- convince its employees to work for free, get the electric company to give it power gratis, and have Habitat for Humanity build its factories ... the stock would still be overpriced at 60x earnings and a 40% growth rate.

Once you realize that even magic can't save this stock, you don't need a crystal ball to see where it's headed.

Fool contributor Rich Smith owns shares of Dolby. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 520 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Trimble Navigation is a Motley Fool Big Short short-sale pick. Best Buy is a Motley Fool Inside Valuerecommendation. Universal Display is a Motley Fool Rule Breakers recommendation. Best Buy and Dolby Laboratories are Motley Fool Stock Advisor picks. Alpha Newsletter Account, LLC has opened a short position on Trimble Navigation. The Fool owns shares of Best Buy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2011, at 1:25 AM, Redistributed wrote:

    In response to Rich smiths article:

    So "Rich Smith" you are also seeing Samsungs 10 billion dollar investment in OLED factories as a flop? Let's see what seems more likely. Samsung the largest OEM provider in the world just demolishes 10 billion dollar factories and reduces its companies market cap by 10% OR The 10 billion dollars spent on the new plants makes them operational increasing the current production output by literally 10 fold. That is the actual increase from current output to new plant capacity by the way.

    Secondly you just made some extrapolations based on your inability to either understand or read financial statements. Had you actually known what you were doing you would have noticed "UDC's", "Yeah everyone else uses the C so that's another way we can tell you're not really up to date on any of this" $0.31 loss per share was the result of a non cash stock warrant liability. Outstanding warrants have to be recorded as a liability via the down round provision. The warrant liability was $13,109,785 for Q1 which is calculated at $8,926,212 via the Black–Scholes model.

    Lets redo the math there. 11,584,400 - 8,926,212 = 2,658,188

    2,658,188 / 38,500,000 shares = .069 or a loss of .7 a share not .31

    That would make it a factor of 2 not 10, but only if we are counting real money.

    Analyst predictions have still not accounted for warrant liability or an obvious increase in operating cost when UDC has to produce more materials for an OEM's expanded production capabilities. This type of stuff seems pretty basic, Am I right?

    Now let's go over Ruch's "Universal disappointment" section

    1- "Earnings. UD's $0.31-per-share loss exceeded consensus estimates by a factor of 10."

    Rebuttal- We have already explained the earnings factor of 2 not 10

    2- "Delays in Samsung's Gen5.5 fab" could delay UD collecting additional revenues from its partner by as much as a year."

    Rebuttal- Samsung Mobile Display puts its 5.5th-generation, or 1,300mm×1,500mm, AM OLED manufacturing lines into operation this month. In addition, it celebrates the completion of its new manufacturing facility for the display panel in June. "Also confirmed by conference call."

    3- ” And guidance again. Canaccord worries that Samsung might play hardball with UD over royalty rates on UD tech, raising the potential that UD will "temporarily walk away from" a customer that currently provides more than 70% of its revenues."

    Rebuttal- Frankly I'm surprised by Canaccord. Lets clear this up as well with a business lesson. UDC allows Samsung SMD to make phones for a number of providers. UDC holds patents that enable Samsung SMD to use their technology to make phones for these providers. What this means this that without UDC's consent Samsung SMD after this 3 month period can simply say. We want 2% if the papers are not signed in a week you must halt all production on your 10 billion dollar factories. Not only does that cost Samsung infinitely more than simply agreeing to a 2% agreement but it delays output for its clients. This also strains Samsung SMD's relationship with its clients. UDC holds the cards in this debate. There is no other OLED company Samsung SMD can use as a provider to produce what it needs.

    By the way there is a retroactive clause in these extensions. This means that "WHEN", and I say that because if they don't Samsung will have 10 billion dollars worth of open floor space, earnings are restated back to 2010.

    Getting to the Well ... maybe not entirely universal part

    "The problem with investing on the bleeding edge of tech is that the future's incredibly hard to predict. Case in point: 3-D television."

    Rebuttal- Let me play both sides to save time

    Fact- OLED will replace LCD and Plasma, Samsung and Sony have decreased the money being spent on LCD

    Counter Argument- Until something better than OLED comes along

    Fact- Any new display tech needs production facilities capable of outputting 100s of millions of screens a year to topple the current tech. This takes time as well as R&D. Basically it doesn't happen overnight so we would see it coming. Usually 10 to 15 years after the tech is proven viable. This was true for lcd and plasma. Companies would then need to invest "roughly" 10 billion in production facilities to make the new tech.

    Counter Argument- production could piggyback off existing lines or be cheaper.

    Fact- This has not happened for CRT, LCD, or PLASMA or any huge display tech thus far. So being reasonable getting production facilities for a new tech will cost billions. Also LED is just a different backlighting method for LCD it's not a new display type it's still an LCD

    Counter Argument- What "IF" I'm wrong about the last fact?

    Fact- Samsung SMD the largest OLED factory owner and largest display provider worldwide is not going to just stop using 10 billion dollars worth of factories and abandon them.

    Counter Argument- What if the new tech is so much better it would make them uncompetitive if they didn't move to it.

    Fact- The color and contrast of the newest OLED screens is so good the human eye couldn't tell if something was better. Super AMOLED PLUS has 16Million Colors used in the new displays while Experts estimate that we can distinguish perhaps as many as 10 million colors. The contrast ratio is 1 million to 1 and the human eye can only differentiate 10,000 to 1 in a stable light condition.

    Check for yourself ......

    Has anyone noticed this as well. New hdtv's look too real. So clear something just doesn't seem right? As if the movement is off and its distracting. it's called Auto motion plus. (AMP) This is Samsungs implementation of motion enhancement (or interpolation).

    It makes normal movies look like they were recorded by a home video camera.

    Looks kind of like a soap opera.

    These LCD's have these enhancers to battle the motion blur inherit with LCD technology.

    OLED TV does not suffer from motion lag or motion blur as does LCD displays. In fact, OLED technology has the fastest response rate time of any type of display due to utilizing TFT technology with the organic light emitting diodes.

    While the "response time" of LCD TVs has markedly improved in the last couple of years, they still suffer from a slight "trailer" effect, where the individual pixels are just slightly out of step with the image on the screen. This can also be described as dithering noise, or a jumpiness in the picture image when a scene is filmed with a moving camera. During fast moving sports scenes, the most discerning eyes can detect this slight motion response lag.

    Honestly, there has been a ton of in depth research done on this. I know Motley Fool isn't just ok with skimming a consolidated earnings report, reading some alternative hedlines, and listening to Jim Cramer say in the course of 3 months he is not interested anywhere from 30-49 then its a buy in the mid 50's then a weeks later a sell in the 40's. Come on!!

  • Report this Comment On May 13, 2011, at 1:27 PM, Eohippus617 wrote:

    Mr. Smith focuses on Oled TV and is concerned about the potential for that market may not come to fruition. And if UDC was solely dependent on OLED TV making it big I would agree with him. I would argue that even if OLED TV is successful-

    (And I think by 2015 it will be the leading screen technology being sold) it will account for less than 10% of UDC's revenue.

    Did you forget the multibillion market for mobile phone screens in which OLEDS are already starting to take over the field only limited by the shortage of screens (hence 5.5 Fabrication coming on line this summer).

    Did you forget the multimillion Laptop/tablet and computer screen market where OLED screens don't need backlighting like current technologies and therefore will be a more green technology with a better looking screen.

    Did you forget the lightbulb market which is conservatively listed as a $100 Billion market opportunity and is really ultimately where OLED should makes it mark. And yes UDC is working on this with US government backing.

    And then there is the wearable displays and military applications of which they are only scratching the surface. Never mind the printable OLEDs (Think Harry Potter like newspapers and books).

    Please Mr. Smith keep talking it down- I want to buy more- but something tells me that after the warrants expire in August and no longer show up on the bottome line I won't be able to get shares under $60 never mind $52 until of course the stock splits

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