Universal Display Lights It Up

Shares of OLED specialist Universal Display (NASDAQ: OLED  ) skyrocketed nearly 16% during Thursday's trading after the company reported its fourth-quarter and full-year 2012 earnings.

So why the optimism?

Though Universal Display's quarterly earnings per share of $0.12 slightly missed analyst estimates that called for $0.13, its revenue beat expectations of $26.4 million after rising 51% from the year-ago period to $28.1 million, reassuring analysts that last quarter's miss was likely a short-term issue.

Inventory also rose to $11 million by the end of the year, up from $9.5 million in the third quarter. When we remember last quarter's barrage of inventory questions from concerned analysts, perhaps its unsurprising that CFO Sid Rosenblatt was quick to point out the company considers "the buildup of inventory an excellent investment of our cash because it improves our ability to quickly fill customer orders and significantly lands our customer goodwill."

In addition, making good on its previously announced (link opens PDF) share repurchase plan, Universal Display used $5.2 million of its available $50 million to repurchase 206,000 outstanding shares. As I suggested in November, it's good to see the company increasing shareholders' slice of the pie after it incurred significant dilution in 2011 to raise capital for acquiring Fuji's portfolio of 1,200 OLED patents.

Fortunately, the Fuji acquisition cost much less than management originally expected, which left the company flush with cash and nowhere to use the excess. Now, with its future prospects looking bright and with shares currently trading significantly below 2011's $46-per-share offering price, this buyback is increasingly looking like a great long-term move.

A guiding light
With regard to guidance, Universal Display was cautious to note OLED adoption is still in its early stages, "where many variables can have a material effect on growth." Even still, the company expects to see $110 to $125 million in 2013 revenue, depending on a few factors including how long it takes Samsung to add production capacity and introduce new OLED products, how quickly those products incorporate Universal's green technology -- remembering this was the concern voiced by Piper Jaffray analysts a few days ago -- and how fast the young OLED television and lighting markets grow.

Even though guidance represents a solid revenue increase ranging from 32% to 50% over 2012, analysts at Cowen wasted no time voicing their approval and saying the numbers were probably conservative given the industry's wider growth potential and Universal Display's collaboration with its Asian supply chain -- a likely reference to Universal Display's cooperative deal with manufacturing specialist Duksan Hi-Metal announced last September.

Considering the pop in shares of Universal Display today, it seems the rest of the market agrees with Cowen, especially when we consider management's comments that electronics giants Samsung and LG (NYSE: LPL  ) will spend 73% and 54% of their 2013 capital expenditure budgets on OLED development, respectively. AU Optronics is also reportedly set to mass-produce OLED displays for cell phones in the first half of this year, and Sony and Panasonic joined forces last year to develop their own large-screen OLED televisions.

For its part, however, LG increasingly appears to be the next huge proponent of Universal Display's technology; part of its spending will include $655 million to build a new OLED TV production line with a monthly capacity of 156,000 55-inch screens, with plans to begin mass production by the first half of next year. Additionally, as I mentioned a few days ago, LG is also pushing hard to commercialize both rigid and flexible OLED lighting solutions which, after OLED television achieves mass adoption, will likely be Universal Display's next big catalyst as other manufacturers continue to move forward with the technology.

Out of the lab, into the fray
Apart from smartphones, television, and lighting, Universal Display CEO Steve Abramson also reminded investors of another potential growth area for the company: encapsulation technology.

Though Universal Display actually unveiled its novel encapsulation techniques in 2011, as adoption of flexible displays and lighting continues to increase, so, too, will the necessity for manufacturers to find effective encapsulation methods for sealing sensitive display materials from environmental elements. As a result, encapsulation could become a substantial source of revenue for Universal Display down the road. According to Abramson during the conference call, the company is currently "discussing potential commercialization roadmaps with a number of partners and [is] in the process of developing [its] encapsulation technology business model."

What now?
Patience is key to Foolishly investing in a high-growth company like Universal Display. Though Samsung remains its single largest customer, the rest of the tech world is finally beginning to take note of the advantages of using OLED. When that happens, and if long-term shareholders can keep their wits about them amid the volatility, I'm convinced long-term shareholders of Universal Display will be handsomely rewarded in due time.

Universal Display's placement at the center of OLEDs makes the company an underappreciated way to play the enormous sales growth in tablets and smartphones. However, like any new technology, there are plenty of risks to Universal Display. Motley Fool analyst Evan Niu, CFA, has authored a new premium report that dives into reasons to buy the company as well as the challenges facing it. For access to this comprehensive report, simply click here now.


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