Universal Display (OLED -1.19%) and Corning (GLW 0.58%) are both top supply chain players in the display panel market. Universal owns the world's largest portfolio of OLED display patents, and sells the raw materials for their production.
Corning develops chemically hardened glass for LCD and OLED display panels, including Gorilla Glass, which is widely used in smartphones, tablets, and other consumer electronics. It also sells optical equipment, lab equipment for life science companies, and particulate filters for vehicles.
Universal's stock declined about 20% this year, as the COVID-19 crisis disrupted the production of OLED panels worldwide. Yet Corning's stock advanced nearly 10% as the stronger segments of its diversified business offset the weaker segments, which were more exposed to the pandemic. Does Corning's more balanced business model make it a better overall investment than Universal Display?
How do Universal and Corning make money?
Universal generated 60% of its revenue from material sales last year, another 37% from royalty and license fees, and the remaining 3% from contract research services. It doesn't manufacture any OLED screens on its own -- it only sells the materials and charges royalties and licensing fees to display panel makers like Samsung and LG Display.
Unlike LCD displays, which light up an entire screen, OLED displays turn individual pixels on and off -- which produces richer colors and contrasts while conserving more power. OLED screens are pricier than LCD screens, but they're now frequently used in high-end phones, TVs, and other devices.
Corning generated 35% of its revenue from optical communications equipment last year, and 28% from its Display Technologies unit, which produces glass substrates for LCD panels.
It generated 14% of its revenue from the Specialty Materials unit, which produces Gorilla Glass and other high-end hardened glasses; 13% from its Environmental Technologies unit, which sells substrates and filters for vehicles; and 9% from its Life Sciences unit, which sells lab equipment.
Which company is growing faster?
Universal's revenue rose 64% last year as its earnings soared 135%. But excluding an accounting method shift last year, its revenue and earnings would have risen 31% and 19%, respectively. Its business held up well in the first quarter, as its revenue rose 28% year over year and its EPS grew 21%.
However, the pandemic caused its second-quarter revenue to tumble 51% year over year, with material orders and license fees grinding to a halt; and its earnings plummeted 98% due to lower gross margins for its materials and the higher costs of dealing with COVID-19.
Corning's revenue rose 2% last year, as the stronger growth of its life science, specialty materials, and environmental technologies business offset the slight declines at its display tech and optical businesses. Its core EPS, which was weighed down by weaker optical margins, dipped 1%.
The onset of the pandemic caused Corning's sales to decline 15% year over year in the first quarter, with only the specialty materials and life sciences units generating positive growth, and its core EPS plunged 50%.
Corning's revenue fell another 13% year over year in the second quarter, as the growth of the specialty material business was offset by declines across all its other businesses. Its core EPS tumbled another 44%.
Which company will recover faster?
Universal didn't provide any guidance last quarter, but CEO Steven Abramson claimed the industry's manufacturing activity was "broadening with new OLED fabs and new OLED products" during last quarter's conference call. CFO Sidney Rosenblatt also said Universal saw a "significant pickup in orders and shipments" in July, but warned that recovery could still be derailed by unpredictable headwinds.
Analysts expect Universal's revenue and earnings to decline 7% and 31%, respectively, this year. But for fiscal 2021, they expect its revenue to surge 42% and for its earnings to nearly double -- thanks to easy year-over-year comparisons.
Corning also didn't provide any guidance last quarter. But during the conference call, CFO Tony Tripeny stated that Corning expects to "grow sales and profits in the third quarter" as manufacturers come back online and stay-at-home trends boost sales of consumer electronics. It also expects rebounding auto sales to lift sales of its filters, and new smartphone launches to buoy its specialty materials business in the second half of the year.
Wall Street also expects Corning's revenue and earnings to decline 7% and 31%, respectively, this year. But analysts anticipate a more moderate rebound in 2021 -- with 9% revenue growth and 46% earnings growth -- as the pandemic passes.
The valuations and verdict
Universal Display trades at 44 times forward earnings and pays a 0.4% forward dividend yield. Corning, which pays a 2.7% forward yield, trades at just 20 times forward earnings. Both companies are poised for strong recoveries next year, but Corning's better diversified business, lower valuation, and higher yield all make it a more compelling buy than Universal at current prices.