Has Universal Display Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Universal Display (Nasdaq: PANL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Universal Display.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 38.7% Pass
  1-Year Revenue Growth > 12% 100.7% Pass
Margins Gross Margin > 35% 40.4% Pass
  Net Margin > 15% 5.1% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 18.56 Pass
Opportunities Return on Equity > 15% 1.6% Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.

Since we looked at Universal Display last year, the company has picked up a point. LED technology continues to advance, with the promise of replacing older technology in the years to come, but that progress won't come without hiccups.

Universal Display makes organic light-emitting diodes for displays on devices like TVs and smartphones. Compared to traditional LEDs, the OLED manufacturing process reduces costs and allows for surfaces that don't have to be flat. OLEDs also give users energy savings over alternatives.

Universal Display got a huge vote of confidence from Samsung last year in the form of a six-and-a-half-year contract. The deal gave Universal Display more certainty in its revenue, given that Samsung is the company's largest buyer. Samsung, in turn, will make glass OLED display panels using Corning's (NYSE: GLW  ) Lotus glass, which can withstand the heat from making OLEDs -- letting Universal Display show off practical applications of its technology. At the same time, the deal also provides Universal Display with leverage against Sony (NYSE: SNE  ) and other smaller and potential customers in negotiating similar long-term deals.

In February, Universal Display announced its third-straight profitable quarter that beat estimates on both earnings and sales. Yet the stock fell sharply, presumably because its sky-high valuation reflected investors' wishes for an even bigger beat.

Nevertheless, Universal Display appears to be on the road to profitability in a promising industry. Both AU Optronics (NYSE: AUO  ) and LG Display (NYSE: LPL  ) plan to boost their OLED production this year, competing with Samsung to offer OLED-based TVs of their own. If that pans out, then Universal Display should see its score rise further in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Universal Display isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Universal Display to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Corning. Motley Fool newsletter services have recommended buying shares of Universal Display and Corning. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (8)

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 March 07, 2012, at 10:21 AM, sidneyleejohnson wrote:

    I think they will close in on at least one of the non-dividend points this year. Revenue is likely to grow 100% a year for quite a few years as lighting kicks in along with TV and other large surfaces. (forget the 38% Long term growth rate its way out of synch with each years analyst expectations combined a perplexing situation if there ever was one... the sum of the parts is way higher than the cagr of 38%). The net margins should improve substantially as revenue rises another 100% with opex held to below a 10% increase. Rising revenues and a relatively constant opex should also help ROE.

    The problem for the last 2 points is that the company has not announced any hint of paying a dividend. Not sure this would happen until the market for both lighting and displays are mature. Well past the "S" part of their diffusion curve. In the mean time they tend to focus on building their patent portfolio no doubt to be sure they can continue their business model. However, I think once cash flow is positive enough to offset defending and adding to their patent portfolio they should strongly consider it. I'm tired of tech companies hording cash and never paying a dividend; like Apple for example. Given their high margin and soaring revenues I really don't see it making sense to hold back very much longer without a dividend.

  • Report this Comment On March 07, 2012, at 12:00 PM, sidneyleejohnson wrote:

    "LED technology continues to advance"

    Why didn't you say

    "OLED technology continues to advance"

    You seem to know the difference...

  • Report this Comment On March 08, 2012, at 10:35 AM, Eohippus617 wrote:

    The problem with Motley is they throw all companies against the same criteria not considering what stage the company is in. I would say that is entirely inappropriate for UDC to be paying a dividend now as they just turned profitable and can't even forecast the next quarter never mind declaring a dividend. So the criteria for a "just" proftable growth company should be different.

    I also find it amazing that the most important long term growth growth catalyst for this company which we be lighting isn't even mentioned in the article (thanks Sidney Lee for reminding them) . Its lighting that will make this a 10-20 bagger in 5-7 years- as they use the other revenue streams (mobile devices, Tablets, TVs, flexible device light, printed light etc. to enlarge the top and bottom lines.) When it comes to PANL you really need to see the light...

  • Report this Comment On March 08, 2012, at 10:51 AM, sidneyleejohnson wrote:

    Prey tell me how your perfect stock model point for "normalized" pe (5 years before/5 years after) makes any sense for emerging technology R&D type firms going through 2 overlapping technology diffusion processes over the next 5 years with essentially no earnings during the last 5 years.

    http://www.jordi.pro/bass/index.php

  • Report this Comment On March 08, 2012, at 10:55 AM, sidneyleejohnson wrote:

    Lastly if a company is growing revenues at 100% / year clips for the next 5 years as it envelopes two different technology diffusion (display and lighting) why we should expect any form of pe to have to be <20? that would put its peg at .2... Seriously? Doesn't the pe benchmark need to be considered less useful in a long term ultra high growth environment.

  • Report this Comment On March 08, 2012, at 2:26 PM, sidneyleejohnson wrote:

    Ok after thinking about it some more how exactly are you defining "normalized PE"?

    or one of these methods:

    prior 10 years' earnings (used by Benjamin Graham, Robert Shiller and others)

    or

    using peak earnings (used by John Hussman)

    or

    Is it the last 5 years of eps and the 5 years of estimate eps?

    You must be using one of the first two approaches to get NM...

    May I suggest that you consider the last 5 and next 5 in order to capture the impact of a diffusion story. The last 10 years of eps for a company that spent it researching the next mousetrap means absolutely nothing for the next 10 if it just started mass production of mousetraps. Having to average 10 years of nothing does not help in accounting for seasonal or economic cycles in panl's case. Its just plain stupid.

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