Display technology developer Universal Display (OLED 4.23%) had a head-scratching kind of a day on Friday. The researcher behind most of the patented technologies that go into organic light-emitting diodes (OLED) posted fantastic fourth quarter results on Thursday evening. Revenue guidance for the next quarter was right in line with the current analyst view. Universal Display even boosted its dividend payouts by 33%, lifting the effective dividend yield to 0.4%. Analyst firms lined up to raise their price targets on the stock.
That type of report usually triggers a bullish share price move the next day. Universal Display rose as much as 2.7% on Friday morning, but then the stock turned around. At the end of the day, Universal Display's stock had fallen 5.2%.
What's the big idea?
By the numbers
Let's take a closer look at the actual results first. Universal Display's fourth quarter sales rose 39% year over year to $141.5 million. Earnings jumped from $0.68 to $1.13 per diluted share, which works out to a 66% increase. Your average analyst would have settled for earnings of roughly $0.64 per share on sales near $109 million.
Looking ahead, management's revenue guidance for the first quarter of 2021 pointed to approximately $545 million. The consensus sales estimate for this period stands at $546 million. The boosted quarterly dividend payout of $0.20 per share reflected management's "confidence in our robust future growth opportunities, expected continued positive cash flow generation and commitment to return capital to our shareholders."
Nothing but good news and blue skies so far.
What's the downside, then?
The impressive fourth quarter sales included a $17 million boost from catch-up posts under the ASC 606 revenue accounting standard. The same ASC 606 review also lowered Universal Display's projected OLED material sales over the next few quarters, having already booked those material sales in the fourth quarter. CFO Sidney Rosenblatt explained that all of the ASC 606 adjustments were a direct result of the COVID-19 pandemic, so that's a unique one-time review that doesn't change Universal Display's long-term business at all. It did affect the company's financial reports from a short-term perspective, though.
If you skipped the last paragraph at the first mention of accounting adjustments, that's perfectly fine. In short, the top-line results look a bit lumpy right now but the business is firing on every cylinder.
What else is going on?
Dig a little bit deeper and you'll find that Universal Display's largest customers are building and activating new factories for OLED television screens these days. Big-screen TVs consume a lot of OLED materials and the company's licensing deals typically base their royalties on the total area of OLED panel production. Therefore, large screens are a huge growth opportunity for this company.
On top of that, Universal Display has developed a new vapor jet printing technology that could lower the manufacturing costs for large-screen OLED panels dramatically. The company formed a new subsidiary named OVJP to commercialize this technology, starting with an alpha-grade demonstration system that should be ready in 2022.
Universal Display is still a solid buy in my book
Universal Display has not stopped pouring rocket fuel in its tanks, and the company is exploring massive target markets such as lower-cost OLED TV sets and power-sipping lighting panels. The stock is trading 15% below January's all-time highs, having gained 26% over the last 52 weeks and 90% in two years.
It's not a cheap stock, but Universal Display is a high-octane growth stock whose value is better measured in terms of sustained revenue growth. If you thought Universal Display shares looked interesting before this week's earnings report, the company did absolutely nothing that takes away from its long-term value proposition. You may want to take advantage of this myopic market reaction to some pointless accounting adjustments and pick up a few shares right now.