South Korean display panel manufacturer LG Display (LPL) has disappointed even the most patient buy-and-hold investors for years. Shares currently hover near all-time lows and are down over 50% from 52-week highs. The sell-off over the past year is completely understandable: Revenue is falling, and profits are gone.
Much of LG Display's current dilemma results from a restructuring effort, opening the possibility that fortunes will improve in 2020 for the realigned company. So does that mean the stock is a buy?
What's gone wrong
Displays are used in TVs, computers, and smartphones. And in the display space, there was a time when liquid crystal displays (LCDs) reigned supreme. LG Display enjoyed many profitable years primarily as an LCD manufacturer. But over time, organic light-emitting diodes (OLEDs) came on the scene. And with several advantages over LCDs, OLEDs have gradually eaten into LCDs share of the overall video display market over the past decade.
LG Display began manufacturing OLED displays back in 2008, and in recent years decided to unwind some LCD operations and pivot hard toward OLED and plastic OLED (POLED). That decision makes sense on the surface. According to website Industry Research, the OLED display market is expected to grow at a 24.4% compound annual growth rate through 2024. This aligns LG Display with a high-growth segment of the display market.
But it was a cash-intensive move. For example, LG Display began manufacturing large OLED panels for TVs back in 2013. But it wasn't until late 2018 that production had grown to the point of being profitable. This cash-intensive reality is also true for LG Display's POLED segment. Higher production costs and increased competition mean that it's still operating this production line at a loss, and was forced to take a one-time $1.2 billion asset impairment loss in the fourth quarter of 2019.
The danger here is that LG Display has fully committed to running a competitive OLED race that ends with a low-margin product that won't be worth the initial heavy investment.
What can go right
While it's been costly to focus on OLED manufacturing, there's a chance that the effort is close to paying off. Management is guiding for OLED shipments to pick up in the first half of 2020, which could lead to profitability on the POLED manufacturing line. And if large-panel OLED shipments increase, that line has already achieved profitability.
Those large-panel displays are used in TVs, which (including LCDs and OLEDs combined) used to account for around 40% of LG Display's overall revenue. In Q4 of 2019, weak demand had reduced TV sales to just 28% of overall revenue. If this relatively profitable segment can again account for a substantial part of overall revenue, that would be something for investors to cheer.
In 2019, LG Display brought in around $2 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), and has an enterprise value (EV) of $4.8 billion, according to Yahoo! Finance. An EV-to-EBITDA of just 2.4 makes the stock dirt cheap at the moment. If OLED production becomes more profitable, it wouldn't be surprising to see the stock rise from its current valuation.
What is the takeaway from all this?
Investing in a declining business is often a bad idea, no matter the valuation. For LG Display stock to be a buy, I'd first want to see that a turnaround is actually underway -- that's not the case right now. Answering an analyst in the Q4 earnings call, CFO Dong-hee Suh said that display shipments overall are expected to decline in the first half of 2020, before picking up in the second half. But even then, he still withheld guidance on when "we will definitely have a turnaround." That doesn't instill confidence.
So I certainly wouldn't buy the stock before the turnaround is actually happening. But even then, just because the business has turned the corner doesn't mean the stock will beat the market going forward.
In the end, there are so many top stock possibilities to outperform the S&P 500 that it doesn't seem worth speculating on LG Display right now.