Universal Display Is the Gift That Keeps on Giving

Shares of Universal Display (Nasdaq: PANL  ) made a huge move in Thursday's action. The reason? Last night's second-quarter report provided plenty of kindle for this fire.

Coming into the report, I mused that the OLED technology researcher should beat Wall Street's revenue estimates on the back of strong smartphone sales by core partner Samsung. The company did exactly that, but not as drastically as I might have expected: The reported $30.0 million in sales was a 166% year-over-year jump that landed just $1 million ahead of analyst targets.

On the bottom line, the year-ago loss of $0.03 per share turned into $0.23 of net income per share. That was actually a penny below analyst targets.

Investor were more than willing to forgive the earnings miss, though. Management boosted the upper end of its revenue guidance range from $100 million to $110 million, keeping the baseline steady at $90 million. Accelerating growth is the keyword that sets Universal investors' hearts a-thumping, so there's the key to today's price jump.

But wait -- there's more!
CEO Steve Abramson also used the earnings call to shed some more detail on several recent moves.

The $105 million purchase of more than 1,200 OLED patents from Fujifilm served two purposes. For one, Fujifilm's patents tend to be younger than Universal's. In fact, about half of the innovations involved still have their patent applications pending. That's how this deal extends the useful lifetime of the overall portfolio.

The $4 million investment in OLED manufacturing expert Plextronics also plays into this part of Universal's strategy. Over time, Plextronics hopes to make inkjet-printing techniques reliable and cost effective for OLED manufacturing purposes, which in turn would make big-screen OLED televisions more cost competitive with today's leading LCD technologies.

Furthermore, Fuji put a lot of work into practical issues like efficient OLED manufacturing and extended pixel lifetimes. These patents can be licensed to Universal's cutomers right away. The other half expands on Universal's own work in OLED materials, and might translate into new business over time as the company extends its reach into multiple layers of onion-like OLED displays.

Oh, and don't expect a massive $105 million expense on upcoming income statements: The cash payment has already been filed against cash flows, but Universal likes to amortize patent deals like the Fujifilm buy over 10 years. Hence, the impact on earnings will come in small, manageable portions over the next decade.

What's coming up next?
Abramson took the time to gloat a little about Samsung's Galaxy S3 smartphone outselling the Apple (Nasdaq: AAPL  ) iPhone at the moment. OLED screens now make up 20% of all small- and medium-sized digital displays, a market that includes the low-end LCD displays found in today's feature phones. Samsung has even come up with a OLED screen design that rivals Apple's vaunted Retina displays in terms of detail, and this one relies on a bog-standard manufacturing method that should speed its arrival on store shelves.

He also pointed to big-screen TV sets slated for the holiday shopping season out of both Sammy and LG Display (NYSE: LPL  ) . Abramson warns us to dial down sales expectations in this market, given that manufacturing methods for large sheets of OLED materials are relatively immature and very expensive. This is more of a long-term catalyst for Universal than an instant millionaire-maker.

Walk away with your head held high
This report did absolutely nothing to undermine my enthusiasm for Universal Display's rapid growth. Keep in mind that current results really only cover one-third of the materials used in modern OLED displays. Samsung and friends only use the red materials here while blue and green come from other providers like Sumitomo Chemical's Cambridge Display unit.

But Samsung is already preparing to introduce Universal's green pixels in upcoming products, and nearly all of the company's research today goes into making blue emitters more reliable and commercially valuable. It's only a matter of time before that nut is cracked, potentially tripling Universal's revenue contribution per screen sold.

My bullish CAPScall on Universal Display is one of the strongest score machines in my virtual portfolio. It's also among the biggest money-makers among my real-world holdings. And I still don't think it's too late to invest in this stock if you're a latecomer to this exciting growth story.

Universal Display is a solid play on smartphone and tablet growth with a free call option on large TV screens a couple of years down the road. Speaking of TVs coming down the road, there are plenty of rumors that Apple might unveil one in the near future. While it may be some time before we find out, our senior technology analyst thinks Apple is a great buy today. So if you're an investor with a hankering for mobile computing, make sure to check out our brand-new premium report on Apple.

Fool contributor Anders Bylund owns shares in Universal Display but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Universal Display and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Universal Display. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 09, 2012, at 7:00 PM, MHedgeFundTrader wrote:

    Steve Jobs’ creation dropped a real bombshell on the market Tuesday when it announced Q2, 2012 earnings that were rotten to the core. The timing could not have been worse for a market that was on the verge of complete nervous breakdown. Of the 53 brokers who provided research coverage of the Mountain View, California firm, 27 rated it a “buy”, 21 “outperform”, and precisely zero “underperform”. And you wonder why retail has bailed on Wall Street.

    The numbers made grim reading. Sales, which had been targeted at $37 billion came in at only $35 billion. Profits amount to $8.82 billion, taking earnings per share to $9.32, well down from the $10.37 expected. Estimates for iPhone sales had run as high as the low 30 millions. The actual figure was 26 million. In overnight trading, the shares opened down a gob smacking $40, instantly vaporizing $37 billion in market capitalization.

    Apple is suffering from the mother of all delayed consumption headaches. Consumers love their products so much they have gone on strike until the vastly upgraded and better performing iPhone 5 is launched in the fall, yours truly included. So the dip in profits will reappear as a spike in profits in the next one or two quarters. This means that if you missed the 50% run up since the beginning of the year, you may have a chance to take another bite at, well, the apple.

    Apple is not just an IPhone story. The mini iPad is expected out soon. Apple TV is expected to be huge next year. Apple has only just scratched China’s market of 600 million cell phone users. Its six stores are regularly the scene of long lines, and occasional riots by consumers desperate to buy their products. Droves are crossing the border by train from Shensen to Hong Kong, where Apple products are more easily available.

    In the spring I lead readers into the August $400-$450 call spread which became one of our most profitable trades of the year. I took them out a month ago because we had already squeezed out most of the profit, and because I thought that exactly this kind of disappointment might occur.

    The intelligent thing to do here is to wait for the current shock to work its way through the system. You also want the present melt down in the broader market to exhaust itself. That could take us well into August. The best-case scenario here is that you get back in when the stock falls all the way down to its June low at $525. If it then drops below $500, double up. This would be a once in a lifetime gift.

    Mad Hedge Fund Trader

  • Report this Comment On August 09, 2012, at 11:10 PM, BlueLens wrote:

    "Plextronics hopes to make inkjet-printing techniques reliable and cost effective for OLED manufacturing purposes"

    I need help understanding this sentence....

  • Report this Comment On August 09, 2012, at 11:39 PM, TMFBiggles wrote:

    @ BlueLens -

    They want to be able to squirt high-tech stuff out of little tubes to make lots of fancy display screens on the cheap.

  • Report this Comment On August 10, 2012, at 9:13 AM, gatzbp wrote:

    @ BlueLens

    Think of the current technique of applying these red/blue/green OLED materials as a can of spray paint - very wasteful/unrefined; Plextronics (and many others) are trying to improve the process so it becomes more like an inkjet printer. Less waste, more accurate, et al.

  • Report this Comment On August 10, 2012, at 10:24 AM, TMFZahrim wrote:

    Thanks for the assist, my friends. @BlueLens, you can also think of it as making next-generation digital displays with an oversized inkjet printer like the one on your desk, rather than using complex industrial techniques no layman could really explain.

    Anders

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