This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Universal dismay
As stock markets around the world turned green, one group of investors looked decidedly glum on Tuesday. While everyone else was popping champagne and tossing ticker tape, shareholders of organic light-emitting diodes pioneer Universal Display (Nasdaq: PANL  ) watched in dismay as their shares plummeted 11% in a widespread sell-off.

For this you can blame the analysts at Canaccord Genuity, which yesterday shaved $5 off its price target for the stock (now $35) while maintaining a "hold" rating. Citing a lack of "catalysts" to move the stock higher in the near term, and new revelations about the company's business model, Canaccord is walking back expectations for the stock.

According to Canaccord, you see, Universal Display isn't making as much money as previously believed on its patent royalties from Samsung. Instead of 1% of the cost of a TV, it's now believed to be collecting just 0.75% -- or about $300 million in revenue through 2017. Universal Display's materials business, of course, is still expected to be about 150% the size of its royalties business -- so about $450 million. But Canaccord warns that these revenues are lower-margin, about "75% vs. 97%."

But wait! What about the 55-inch TV?
Now, Universal Display fans will probably point out that $750 million in revenue over the next several years, while not $850 million, is still heady growth from today's run rate. They'll also argue that there are catalysts on the horizon, as evidenced by LG's announcement that it's going to begin selling a new 55-inch OLED TV. But to this, Canaccord replies that "a long-term agreement with LG has been delayed and that the existing materials and license agreement will be extended by another six months through June 2012. This push-out may come as a disappointment to investors looking for a positive near-term catalyst."

"Anticipation, anticipation... is keeping me waiting"
Disappointment is certainly the right word for investors who bought into the UD buy thesis of another analyst last month. As you may recall, that was when Goldman Sachs made a series of bets in the LED/OLED industry. That analyst told investors to buy into Cree (Nasdaq: CREE  ) first of all, because that company is closer to an inflection point as industry begins adopting LEDs for general lighting purposes. But further out, Goldman saw Universal Display and organic LEDs as the better long-term bet.

Indeed, Universal Display may ultimately turn out to be the best long-term debt. The company just turned free-cash-flow positive, after all. Problem is, with just $6 million in trailing free cash to its credit, Universal Display's price-to-free-cash-flow ratio of nearly 266 isn't going to win it any prizes from value investors. This week, it seems it's not winning any prizes from the gung-ho growth seekers on Wall Street, either.

A better idea
What's a better way to make money on the market? I've said it before and I'll say it again: I think General Electric (NYSE: GE  ) is today the company best-positioned, and with the best economies of scale, to make money from the LED revolution. It's already tied up with Cree to help it build out a line of LED lighting products. I wouldn't be surprised to see GE collaborate with Universal Display, too, when OLED technology becomes commercially viable on a large scale.

When that happens, I'm pretty sure GE will find a way to make money on it. Universal Display probably will, too -- but as we found out this week, maybe not as much money as its shareholders hope.

But what's the absolute best tech bet to make in the new year? Read all about it in the Fool's new -- and free! -- report: "The Next Trillion-Dollar Revolution."

Motley Fool newsletter services have recommended buying shares of Universal Display, but Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 357 out of more than 180,000 members. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2012, at 5:25 PM, sidneyleejohnson wrote:

    "long-term debt."??? fire your editor?

  • Report this Comment On January 04, 2012, at 5:29 PM, sidneyleejohnson wrote:

    you neglated to remakr on JD's uncertainty regarding of panl's role in the secular oled trend ...or his remark about investors already pricing in oled in CES 2012 despite short interest rising to skyhigh % of float. These off the cuff remarks speak volumes about his firms motives and negative bias toward UDC. The stock most certainly has not priced in CES, nor is it appropriate to suggest that panl's role in the oled secular trend is uncertain. Look at his words not just his #'s and you'll grasp the bigger picture of what they were trying to accomplish with the "hold rating" and drop in price target. Fail to Deliver much?

  • Report this Comment On January 04, 2012, at 5:35 PM, sidneyleejohnson wrote:

    Everyone's eyes have been on LG's 55" TV but the real McCoy is whether SMD stays on track with their 55" TV. I can't speak to which is better SMD's approach or the RGBW WOLED approach from LG. I can suggest that SMD has been the major player in AMOLED. This is the target to watch and to understand panl revenue growth you have to watch the SMD production/sales guidance like a hawk. SMD announces this friday guidance for the Oct-Dec. PANL scales nearly perfectly with smart phone sales growth. Once SMD adds tablets in volume and TVs the amount of oled materials needed explodes again. Not counting any lighting sales, SMD expects oled production to rise 7 fold by 2015. Expect PANL to trace this route via material sales and if lighting contributes significantly from various manufacturers in Japan, Europe?, and India it goes up even more than SMD expectations.

    http://www.oled-display.net/samsung-mobile-display-produce-8...

  • Report this Comment On January 05, 2012, at 4:37 PM, SelfmadeMillion wrote:

    Dear: Sidney

    Thank you for your research and your knowledge about panl company. Your response you have made on this site about panl this week alone was very precise in my opinion. I have no idea how people (JD) just don't get it? It's the next technology of screens that everyone watches or uses every day for work or personal use. Of course there are competitions to worry about as well, but having Samsung as a client for Panl, how can we go wrong? Correct me if I'm wrong, but I'v heard on the 55"woled the LG is coming out with LG is using PANL red diod. Anyhow long story short, thank you for sharing your comments. It was very profitable today! :)

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