Ain't it a kick in the teeth when companies in a hot market just can't seem to make very much money? That would seem to be the problem these days in the flat-panel world. Flat-panel monitors are now standard fare from the likes of Dell (NASDAQ:DELL), and flat-panel TVs continue to fly off the shelves at Best Buy (NYSE:BBY). But great financial and stock market performance still seems to be eluding the likes of LG.Philips (NYSE:LPL) and AU Optronics (NYSE:AUO).
In LG.Philips' earnings report, we see that this joint venture between LG Electronics and Philips (NYSE:PHG) posted sales that rose 20% over last year, but fell 17% sequentially. For this quarter at least, the trouble was twofold. The company shipped less and reaped a lower average selling price (ASP) as well -- particularly in the notebook/monitor market, which still composes about a quarter of the business.
Profitability, though, proved even more troublesome. While the company reversed year-ago losses, sequential operating and net profits were each down about 85%. And that's one of the unfortunate problems of this whole industry. ASPs may decline, but operating costs don't necessarily follow, and that's especially true when these companies are still ramping up new production capacity.
And it's not as though the news for the immediate future is looking all that great. For the next quarter, the company is expecting a rather robust shipment boost (up more than 25%), but ASPs are likely to decline again by a high-single-digit amount. What's more, while everybody is expecting the World Cup to be a boon to the industry, I'm not so sure -- I think plenty of TVs will be sold, but I'm not sure that pricing will cooperate as much as the optimists seem to think.
Making matters more challenging, it seems like everybody is still investing in even more capacity, highlighted by a recent announcement between Samsung and Sony (NYSE:SNE). So it looks to me like there's certainly a possibility that this will be a fantastically successful market in terms of units sold and revenue booked, but that nobody will ever figure out a formula to produce desirable and sustainable returns on capital.
That doesn't mean there's no chance of investors succeeding here, but it does mean that caution is the order of the day. When you're dealing with companies/industries that seem structurally incapable of earning back their cost of capital, you have to keep in mind that sooner or later you'll start pressing your luck.
For more flat-screened Foolishness:
- Bigger Screens, Bigger Profits at AU Optronics
- In Case of Guidance, Break Corning?
- Can LG.Philips Rise Above the Glut?
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
