It's hard to believe in the booming industry for the manufacture and sale of flat-panel TV sets, but LG.Philips (NYSE:LPL), subsidiary of South Korean LG and Dutch Philips, lost money last quarter. And analysts are predicting yet another loss when the firm reports its Q3 2006 numbers on Tuesday. Will the TV maker prove them wrong?

What analysts say:

  • Buy, sell, or waffle? Of the 27 analysts tracking LG.Philips, there are a dozen buy ratings, a dozen holds, and three sells.
  • Revenues. For all of the attention it receives abroad, LG.Philips gets barely a glance from Wall Street, where only three analysts follow it, and only one of them publishes quarterly estimates. For tomorrow, that analyst expects to see 13.5% sales growth to $3 billion .
  • Earnings. . and a $0.41-per-share loss, versus last year's $0.32 per share profit.

What management says:
As mentioned above, LG.Philips' second quarter was rough. Profitability evaporated as sales growth stagnated. But in at least one sense, referring to "sales" here is a bit misleading. The fact of the matter is, flat-panel TV sets -- and, consequently, the flat panels this company manufacturers for incorporation into TV sets -- have been, according to management, "flying off the shelves at Best Buy (NYSE:BBY) and CircuitCity (NYSE:CC)."

Unfortunately for LG.Philips, one important reason for all the off-the-shelf-flying is that prices have been dropping like a rock. Which leads us to the company's big problem: It's selling more stuff, but each unit of stuff sold is fetching smaller and smaller prices. In comparison with Q2 2005, it sold about 17% more LCD units, but the price of each unit sold dropped even more, thereby canceling out any possible gains in revenue. Meanwhile, the cost to manufacture each unit kept on rising -- up 17% year over year.

What management does:
The results of these pricing dynamics can be seen in the table. Rolling gross margins slumped last quarter, and operating and net margins fell along with them. Before the second quarter, however, they had been rising sharply. So, clearly, this is a volatile market. Until it settles down a bit, we should not be surprised to see further abrupt shifts in profitability.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Looking forward, CFO Ron Wirahadiraksa advised investors to "expect to see prices begin to stabilize" in the second half of this year, with the trend becoming clearer in Q4. At the same time, the company aims to continue growing its unit shipments at a rapid clip -- it's aiming, in fact, for 20%-plus sequential growth in shipments. Meanwhile, it hopes to hold the line on pricing so that the average selling price per square meter of product remains flat. Key to achieving these objectives, however, will be the ability to manage what Wirahadiraksa referred to as a "period of overcapacity, primarily in the LCD TV segment." To resolve the situation, the company aims to "control inventory levels going forward," postpone investment in existing flat-panel factories, and spend less on capital expenditures.

I agree with the objective. Over the past six months, LG.Philips grew its sales by less than 10% year over year, while its inventories of unsold product climbed to the rafters, up 61%. But I fear that cutting back on investment won't suffice in a situation like this. Rather, management will be forced to let its selling prices continue to fall so it can clear out its excess inventory. And if I'm right about that, then it seems very unlikely indeed that the company's rosy scenario of rising shipments, flat pricing, and resulting boffo profits will come to pass.


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Fool contributorRich Smithdoes not own shares of any company named above. The Fool's disclosure policy is highly defined.