Is Universal Display a Universal Winner?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the electronic equipment, instruments, and components sector, where I've rated companies such as JDS Uniphase, Mellanox, and InvenSense to outperform the broad indexes, the CAPS supercomputer thought I also might be interested in another electronics-components maker, this time Universal Display (Nasdaq: PANL  ) , the leading maker of OLED screens. It was one of five Stocks of the Day that it offered up for my consideration this week.

Considering TV shipments fell last year for the first time since 2004, and NPD DisplaySearch expects there to be a long-term global sales decline of 8% for LCDs by 2015, let's see what Universal has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Universal Display snapshot

Industry Electronic Equipment, Instruments, and Components
Sector Information Technology
Market Cap $2.0 billion
Revenues, TTM $83.0 million
Return on Investment 6.2%
Estimated 5-Year EPS Growth 24.7%
Dividend and Yield NA/NA
Recent Price $44.07
CAPS Rating (out of 5) ****

Source: S&P Capital IQ.

Rise of the robots
LCD screens may be on the decline, but they're being replaced by OLED screens, next-generation organic light-emitting diode technology that offers the best combination of LCD and plasmas. Market researchers expect OLED to quadruple its market share to 16% by 2015, and as exciting as that potential is, the technology also has big implications for mobile computing.

According to the Fool's Anders Bylund, one of the biggest proponents of Universal's leadership potential, 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. The battle between Samsung and Apple (Nasdaq: AAPL  ) for smartphone superiority underscores the crux of the situation.

Samsung's Galaxy S3 phone features Universal Display's OLED screen, and its ever-widening popularity ensures it will keep receiving material orders. That Samsung's management boosted the top end of its revenue guidance 10% to $110 million means the smartphone maker doesn't expect demand to soften anytime soon.

The report also suggests that Apple is worried about losing share to Samsung, since it's seeking to ban imports for the S3 and Note, which also uses the OLED screen, following its patent infringement case victory.

OLED TV screens are still an expensive proposition, and LG Display (NYSE: LPL  ) , which uses Kodak's alternative white OLEDs with color filter process, is holding off on ramping up volume production of a 55-inch screen until all the bugs can be worked out (LG extended a supply agreement with Universal earlier this year). The 55-incher would be the largest OLED screen on the market, but Sony (NYSE: SNE  ) and Panasonic (NYSE: PC  ) are expanding their own screen sizes too to meet market demands.

It's not quite the Jetsons
At 26 times earnings estimates, Universal seems a bit expensive at these levels, even when you look at ebullient analyst growth prospects. Add in that its enterprise value trades at 80 times its free cash flow, and the gains its made have richly rewarded it but don't make it a buy right now.

Although its large presence dominates smartphones, with the TV market lagging (through no fault of its own), I'd hold off on staking a claim here just yet. The Motley Fool CAPS community might disagree, as 94% of the nearly 1,300 members weighing in on the OLED screen specialist think it will outperform the broad indexes, but let me know in the comments box below if your outlook is just as crystal clear.

No buzzkill here
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Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple and Universal Display. Motley Fool newsletter services have recommended buying shares of Apple and Universal Display and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, 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. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (6)

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 September 16, 2012, at 6:33 PM, RoniBrazil wrote:

    Your insight is very wellcome.

    On Friday I sold 2 PANL 12/22/2012 45.00 puts.

    Universal Display is on my list of "sexy" stocks.

  • Report this Comment On September 17, 2012, at 11:32 AM, sidneyleejohnson wrote:

    What forward looking PEG ratio do you deem "acceptable"... What impact do you think a 90% gross margin, constrained opex at 10% increases per year, and triple digit eps/revenue growth have on your vaunted price to free cash flow ratio over time? Your long term analysis appears nearly blind on panl. Other investors get it already (>85% institutional ownership , 10% by Robert Citrone/Discovery Capital) and haven't waited to arrive at the new years party after the ball drops (OLED TV). Some investors drive looking forward and not by looking through their rear view mirror.

  • Report this Comment On September 18, 2012, at 9:42 AM, coveman100 wrote:

    If you're into electronic components and gadgets you should be looking at EMAN

  • Report this Comment On September 20, 2012, at 5:05 PM, RockyTopBob wrote:

    You either get in on the front end of a major change in the electronics industry or you don't. If you wait for every TV and display screen to be OLED it would be the same as waiting to buy AAPL until they dominated the market. Don't you wish you bought AAPL 5 years ago?

  • Report this Comment On September 24, 2012, at 5:14 PM, chrisflyz wrote:

    The thing is that PANL is not simply a flat screen play. I have always loved it for its diversity including its military contracts, patents, and especially lighting. The lightweight screen technology will be a star in aviation even if that isn't a huge market. Most of all, Universal Display seems to be willing to lead and show us the future. Then they show you how to fabricate it. Then they patent it.

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