Foolish Forecast: Cambridge Display Goes Dark

Polymer organic light emitting diode researcher Cambridge Display (Nasdaq: OLED  ) reports second-quarter earnings results Wednesday morning. It's never earned a profit before. And as you'll see below, it may never earn one in the future.

What analysts say:

  • Buy, sell, or waffle? Four analysts attend Cambridge, giving it a buy and three hold ratings.
  • Revenues. On average, the analysts expect to see a 14% rise in revenues, to $3.1 million.
  • Earnings. Losses are expected to widen to $0.32 per share.

What management says:
The big news at Cambridge display this quarter is that in all likelihood, there will be no next quarter. At least, not as an independent company. On July 31, Cambridge agreed to be merged with a subsidiary of Japan's Sumitomo Chemical, a $13.2 billion behemoth, presumably to be incorporated into its fourth-largest (of seven) business segments, "IT-related chemicals."

What management does:
Or rather, what management used to do: It improved Cambridge's gross margin significantly in recent quarters, but it utterly failed to keep costs in line so as to give the firm a fighting chance of earning a profit as a standalone operation.

Margins

12/05

3/06

6/06

9/06

12/06

3/07

Gross

46.2%

45.2%

47.4%

49%

61.8%

59.9%

Operating

(169%)

(170%)

(167.2%)

(257.4%)

*

*

Net

(76.4%)

(72.7%)

(62.8%)

(101.1%)

*

(278.9%)

*At some point, losses get so big our data provider has trouble making sense of them. Cambridge has reached this point. All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As we bid Cambridge a fond farewell from the Nasdaq and the world of independent companies, two bits of business remain to be mopped up.

First, what the news means for shareholders: Upon consummation of the merger, they'll be bought out at the princely sum of $12 cash per share, a 95% premium to what those shares were fetching the day before the merger announcement.

Second, what it means for shareholders of Cambridge's archrival in the field of OLED research, Motley Fool Rule Breakers recommendation Universal Display (Nasdaq: PANL  ) : On the one hand, this is bad news, in that it gives Cambridge a strong financial backer to finance its research efforts, and keep it competing and competitive with Universal Display. On the other hand, the news is both good and bad for Universal Display shareholders. Good because it gives some context for valuing their own investments in Universal Display. At a total purchase price of $285 million, Sumitomo apparently valued Cambridge and its technology at 29 times sales. Bad because (don't look now) Universal Display shares are fetching closer to 46 times revenues.

Granted, the comparison isn't direct, because, for example, Universal Display is getting better gross margins than Cambridge ever did. Also, it's ahead of the race, revenues-wise. So it's only logical that Universal Display should command a higher value -- the question is whether it's worth nearly 60% more than Cambridge.

Well, is it worth so much more? Learn what our Rule Breakers team thinks about this when you try out the service free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.


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