Attention LCD shoppers! Get your credit cards ready, set, shop!
It's about to become sale time for the flat-panel set (pun intended). According to a report put out by Reuters over the weekend, the world's largest producer of the ultra-thin, ultra-clean glass used in manufacturing LCD televisions, Sharp Corporation (OTC BB: SHCAY), will be investing $1.9 billion to build a new factory to put out the glass -- a factory that could well be a cut above anything that competitors such as Philips (NYSE:PHG), Samsung, and LG Electronics have yet to muster.
Termed an "eighth generation" fabrication plant, the new factory could be capable of producing "motherglass" -- the initial sheets of glass that are cut up to form panels for individual LCD screens -- measuring 2.16 by 2.4 meters. That would be larger than the "seventh generation" fabs currently being operated by competitors Samsung-Sony (NYSE:SNE) and LG.Philips LCD (NYSE:LPL). And when it comes to LCD-quality glass, bigger sheets are better. The bigger the sheet, the more efficiently a plant can operate, producing more large-screen glass per sheet and wasting less glass.
So when Sharp's new plant goes on line in mid-2006, this will at once increase the supply of LCD glass worldwide (tending to lower prices for buyers) and also allow Sharp to operate more efficiently (also allowing for lower pricing). The company is already far and away the leader in this market. Its 32.8% market share is nearly as much as its next two largest rivals can muster combined. LG.Philips and Chi Mei both have about 17.5% shares of the market. No. 4 Samsung has a 13.2% share.
But that doesn't necessarily make Sharp a good candidate for investment. In his recent book, Running Money, former hedge fund operator Andy Kessler described Sharp (in 1991) as being a company that appeared profitable on its accounting books, but that was actually losing "all their earnings" from operations, making up the losses on stock market and real estate gains. Kessler extrapolated from that observation, plus others that he had made while in Japan, that "the entire Japanese electronics business was, well, a profitless pit."
Today, despite its market share dominance and its investments in state-of-the-art production facilities, Sharp still gets just tiny profit margins for its trouble -- about 3%. Sharp does not manage these margins efficiently, as other low-margin companies like Wal-Mart (NYSE:WMT) or Best Buy (NYSE:BBY) do. Both of those companies also earn margins in the very low single digits. But while Sharp manages a return on equity from its business of just 8%, Best Buy makes nearly twice that, and Wal-Mart, three times.
Moral of the story: As Sharp's products get cheaper, it's OK to take advantage of that and go bargain hunting. But beware of buying the stock.
For more Foolish news and commentary on all things flat-panel, tune in to:
- Corning Calls It Right
- Sony's Flat Faux Pas
- Slim-Fast for Your TV
- Motorola Powers Down
- LG.Philips: This Side Up
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
