Are Universal Display Corp's Crazy Swings Finally Over?

Universal Display investors weren't subjected to their usual wild post-earnings swings today. Here's what's happening.

Feb 28, 2014 at 9:13PM

Universal Display, LG Display

Image source: Universal Display

Going into Universal Display Corp's (NASDAQ:OLED) fourth-quarter report Thursday after the market close, investors were bracing themselves for a wild ride.

Can you blame them? In the day following each of its past seven quarterly reports -- going all the way back to the start of its long-term deal with Samsung Display in late 2011 -- shares of the OLED technologist have either popped or plunged by an average of 17%.

But this time was finally different: Universal Display reported earnings yesterday after the market close, and shares promptly dropped "only" 8.8% in early trading today. What's more, the stock has largely recovered its losses as I type, and currently trades only a few pennies below yesterday's close.

This also marks the first time shares of Universal Display have dropped after a quarter in which it received its twice-per-year license payment from Samsung. Similarly, November's 25% post-earnings pop marked the first time shares actually rose following a quarter in which UDC didn't receive that payment.

Here's what happened
For that, Universal Display can thank the growing influence of OLED material sales, which rose 153% year over year in Q4, and helped drive total revenue up 76%, to $49.5 million. Analysts, on average, were expecting fourth-quarter sales of $46.92 million. In short, materials sales are increasingly helping overall revenue look significantly less chunky.

As a result, Universal Display's adjusted fourth-quarter earnings nearly tripled over the same year-ago period, to $16.5 million, or $0.35 per share. Analysts were looking for earnings of $0.34 per share.

Universal Display's Balance sheet also remained healthy, with no debt and $272.6 million in cash at the end of calendar year 2013.

But investors were less enthused by Universal Display's fiscal 2014 guidance, which calls for revenue in the range of $190 million to $205 million. The midpoint of that range falls roughly $1.9 million short of Wall Street's expectations for 2014 sales of $199.39 million.

However, considering Universal Display's propensity for raising guidance late in the year, I wouldn't be the least bit surprised if the current range proves conservative.

To be sure, Universal Display CEO Steve Abramson reiterated the bulk of their material sales growth will occur in the second half of the year, when most of the industry's OLED production capacity buildouts are scheduled for completion. Perhaps, most notably, and as I suggested last week, Abramson confirmed LG Display's (NYSE:LPL) Gen-8 OLED television facility should start ramping then.

And though there were no specific references to LG Display's rumored flexible screen supply deal for Apple's iWatch as I had hoped, Abramson did point out in the call that LG "is looking to double its flexible display capacity."

Then, mere moments later -- and in what I'm optimistically choosing to read as more than just coincidence -- Abramson lauded Samsung's recent unveiling of its own Galaxy Gear 2 smartwatch and Galaxy Gear Fit device. Both utilize small OLED displays, but the latter incorporates a beautifully curved OLED screen:

Gear

Samsung's new Galaxy Gear fit device features a curved OLED display, Source: Samsung

Finally, management provided no further explanation for the possibility of a similar long-term supply agreement between Universal Display and LG Display, so their comments on the topic two weeks ago will have to suffice for now.

At the time, they told investors they're perfectly comfortable selling to LG Display under the current short-term agreement because LG simply hasn't reached the required volume for the cost structure of a long-term deal to make sense. That's fair enough, and I still expect a long-term deal to be signed by the end of the year.

Foolish takeaway
I'll admit I've actually enjoyed today's muted negative reaction and subsequent gradual recovery. Why? Because, for once it seems the market is responding to Universal Display in semi-normal fashion. As a longtime Universal Display shareholder myself, I could use a little more "boring" in my life.

Speaking of huge potential...
That certainly doesn't mean Universal Display doesn't still boast incredible long-term growth potential. To the contrary, I think the stock should be able to reward investors handsomely going forward.

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Steve Symington owns shares of Apple and Universal Display. The Motley Fool recommends Apple and Universal Display. The Motley Fool owns shares of Apple and 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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