2020 has been a wild ride for Universal Display (OLED +10.68%). Shares have yet to reclaim all-time highs after getting halved in value back in March, but after a rebound in sales during Q3 they're well on their way. OLED displays continue to pick up momentum even during the pandemic, and could build some serious steam during the all-important holiday shopping season. A confluence of events bodes well for this screen technologist, and shares look like a reasonable value.
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Resilient demand during the summer
After a disastrous Q2 2020 in which year-over-year sales fell by half and profits dwindled to almost zero, Universal Display (UDC) came roaring back in the summer as economic lockdowns eased around the globe. Revenue increased 20% in Q3 from a year ago to $117 million, driven almost entirely by higher sales of materials used in the manufacture of OLED screens. Slightly higher expenses, higher taxes, and less interest income compared to the same period in 2019 led to a less dramatic 9.5% increase in net income to $40.5 million.
Nevertheless, while uncertainty surrounding the pandemic continues to weigh on UDC, the sharp drop in activity in Q2 has largely been mitigated. Management also put full-year 2020 guidance back in place, calling for sales of $385 million to $400 million compared to $405 million last year. Not bad for a technologist directly tied to a battered manufacturing sector still trying to rally from both supply chain and demand disruptions.
Through the first nine months of 2020, UDC is clearly back on track to reaching year-over-year growth -- though the bottom line may not see a more pronounced recovery until 2021.
|
Metric |
Nine Months Ended Sept. 30, 2020 |
Nine Months Ended Sept. 30, 2019 |
Change |
|---|---|---|---|
|
Revenue |
$287 million |
$303 million |
(5%) |
|
Gross profit margin |
79.6% |
81.2% |
(1.6 pp) |
|
Net income |
$79.5 million |
$112 million |
(29%) |
|
Free cash flow |
$56.6 million |
$112 million |
(49%) |
Pp = percentage point. Data source: Universal Display.
How cheap is it really?
A confluence of events may lead to even more dramatic growth in the coming quarters. Several dozen new manufacturing facilities dedicated to OLED screens are opening, helping drive down the cost of 4K OLED TVs and other consumer tech containing the next-gen displays. Smartphone sales (UDC's largest end market) fell off a cliff in the spring, but new 5G mobile network-enabled models are here -- most of which feature OLED screens.
In what is expected to be a record holiday shopping season at the end of a tough 2020, this bodes well for UDC. More screens means more material sales to its manufacturing partners. Thus, though the stock trades for a premium price, I think it's worth it. Shares trade for 85 times trailing 12-month free cash flow (operating cash flow minus capital expenditures), though that reflects the sharp drop-off in the bottom line the last two quarters due to COVID-19 effects. This metric will likely improve in 2021.
UDC has a massive $673 million in cash and short-term investments on its balance sheet and no debt. Backing out its cash and equivalents, UDC's enterprise value to free cash flow is further reduced to 79 times. Still not cheap -- but reasonable given the disruption this year. And the long-term growth potential is still there: Management remains undeterred from its previous guidance predicting 50% higher OLED manufacturing capacity by the end of 2021 compared to where it was at the end of 2019. And UDC has other prospects in the works, like its recently formed OVJP Corp subsidiary to further reduce manufacturing costs, which in turn will help with consumer adoption.
Paired with what could be a banner year for sales during the fourth quarter, Universal Display could get hot again real quick -- and that's to say nothing of its longer-term prospects, given that OLED is slowly but steadily catching up to LED screen technology in total market share.
