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 and then decide whether Universal Display (NASDAQ: OLED  ) 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.
  • Moneymaking 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%

49.1%

Pass

 

1-year revenue growth > 12%

35.8%

Pass

Margins

Gross margin > 35%

39.9%

Pass

 

Net margin > 15%

11.6%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

12.00

Pass

Opportunities

Return on equity > 15%

2.8%

Fail

Valuation

Normalized P/E < 20

168.62

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Universal Display last year, the company held on to the point it gained from 2011 to 2012. But the stock has struggled lately, falling more than 15% over the past year.

Universal Display's innovative organic LED technology has the promise to transform the way people watch television. Already, the company has gotten its products into a wide variety of smartphones and tablets from Samsung and other major players. But the big market will come from large-screen OLED televisions, and AU Optronics (NYSE: AUO  ) and LG Display (NYSE: LPL  ) have all joined Samsung in licensing Universal Display's technology for TVs. Given that a single large-screen TV has 100 times the display area of a small smartphone, OLED TV is the mother lode that Universal Display hopes to dig into.

Unfortunately, the industry has moved slowly toward OLED TVs. LG has finally started making shipments of the displays, and Samsung introduced a curved OLED TV at the Consumer Electronics Show in January, but it'll still be a while before the companies get to full-scale production levels.

In its most recent quarterly results, Universal Display managed to beat sales expectations, although its earnings came in slightly lower than expected. The company's guidance was also positive, sending shares higher, but with Universal Display so reliant on its major customers, it's extremely difficult to count on the company's calls on sales when a production delay or other strategic decision beyond Universal Display's control can have such a huge impact.

For Universal Display to improve, it needs to take advantage of its technological advantages to try to boost margins and get more profit from its sales. Widespread adoption of OLED TVs will help, but only by emphasizing quality will Universal Display avoid falling into the trap of selling what could become a commodity material in the years to come.

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 out the best investments from the rest.

Universal Display has long been underappreciated despite the enormous sales growth in tablets and smartphones it has seen in recent years. However, like any new technology provider, 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.

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


Read/Post Comments (1) | Recommend This Article (5)

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  • Report this Comment On March 10, 2013, at 2:00 PM, aksyfan wrote:

    Nice opinion and article. However, by the time UDC has "passed" all your criteria the train will have long left the station. There isn't really a question of "if" or even "when" OLED will become the display and lighting technology of the future. The time is now and the roadmap is clear. For many years UDC has always had the potential for being the "perfect stock" as you call it. I prefer the term "perfect company". The stock performance will follow suit. *Now* is the time for prudent investors to climb aboard the caboose.

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