Check This to See How Should You Should Play Universal Display

There's no foolproof way to know the future for Universal Display (Nasdaq: OLED  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can, at times, suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Universal Display do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Universal Display sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Universal Display's latest average DSO stands at 57.6 days, and the end-of-quarter figure is 63.3 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Universal Display look like it might miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Universal Display's year-over-year revenue grew 18.7%, and its AR grew 20.9%. That looks OK. End-of-quarter DSO increased 0.8% over the prior-year quarter. It was up 123.5% versus the prior quarter. That looks like seasonality. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool recommends Universal Display. The Motley Fool owns shares of Universal Display. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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  • Report this Comment On July 09, 2013, at 12:30 PM, showmethemonet wrote:

    seriously? you posted the exact same article on may 23 2012, essentially

  • Report this Comment On July 09, 2013, at 12:32 PM, ScottAtlanta wrote: you cast doubt onto OLED's "prospects", suggesting it might be a "pretender"....then plug "three (other) stocks to help you retire rich"....

    You fail to mention in ANY of this-- the relatively recent income flows from Samsung with the recent adoption of the Oled technology in the form of AMOLED screens (the past year or so of your chart). Further and most significantly you fail to integrate into your discussion the impact of Samsung's payment structure on your chart (with payments every OTHER quarter) so that a there's is a built in see-saw pattern over the course of a year. This will occur until Other companies adopt and expand the use of LG's cap ex of 500 million? a billion? to build out an OLED TV manufacturing facility that will need materials from....OLED (Universal Display).

    If you're going to cast doubt on a should put your data into context. We could do a "chart analysis" OR some other form of specific non-contextual analysis of Apple to look at it's prospects. The chart would say...without a doubt that Apple may be a "pretender" and the "future is cloudy."

  • Report this Comment On July 09, 2013, at 3:20 PM, Ernestino wrote:

    I agree with the two comments above.

    This article is not helpful in evaluating an investment in OLED/PANL because it fails to consider the unique cyclical nature of the quarter-to-quarter cash flows for this business.

    It is an application of metrics without judging whether they are the best, or most appropriate, measures of the phenomena being studied.

    As the author correctly states: " Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations".

    Unfortunately, too many Motley Fool "articles" are of this nature - short on analysis with in depth understanding - and come with "teaser" solicitations for Motley Fool newsletters with "more detailed" investment advice.

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