At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
It's all about the "O"
Universal Display (NAS: PANL) shareholders are feeling downright ecstatic this week, and rightly so. On Monday, shares of the organic light emitting diode (OLED) pioneer popped 16%, on news that Korea's LG Electronics will follow in Samsung's footsteps and market a smartphone equipped with UD's OLED screen. One day later, the shares jumped for joy again -- up 24% this time -- when UD announced a new licensing agreement with Samsung itself. Then, the back-to-back burst of good news generated a third positive announcement, when Brigantine Advisors upgraded shares of UD to "buy."
According to Brigantine, the Samsung announcement is the real news here, because it positions UD to "grow revenues as new OLED capacity ramps." Analysts at TownHall Investment Research agree, arguing that this deal is actually bigger than just LG and Samsung. According to Townhall, Samsung's expanded relationship will enable the production of 30 million small OLED displays per month -- enough to support the potential integration of OLED technology into future versions of Apple's (NAS: AAPL) iPhone.
And even that isn't the end of the good news. Brigantine sees AU Optronics (NYS: AUO) , LG Display (NYS: LPL) , Sony (NYS: SNE) , and Chimei all expanding their use of UD's technology, and predicts that UD will announce new customer relationships in the coming months. And if Apple "goes OLED," it's almost a given that the many manufacturers of Android-powered phones will feel compelled to match its move in the mobile arms race. In short, Brigantine believes that this is the end of the beginning for UD, and argues the company is now set to embark upon a new stage of rapid growth. The only question remaining: How much is that growth worth?
Noting that unprofitable UD had no P/E to base a valuation upon (a complaint Brigantine echoed in yesterday's upgrade), I pointed out that at 60 times annual sales, UD shares looked pretty pricey relative to analyst projections of 40% growth at the company. However, a couple of factors have changed since then.
First, UD shares today cost only a little more than two-thirds what they fetched back in early May. Valued in relation to sales, the company's P/S ratio has fallen from the 60-times-sales ratio I cited back then, all the way down to 41 times sales today -- and that's even after the 45% run-up in share price over the past two days. What's more, if Brigantine, Townhall, and the other analysts now singing its praises are correct, UD's P/S ratio could fall even farther as sales ramp over the quarters to come.
Sales -- pfui! Where's the profits?
Of course, bigger sales confer little more than bragging rights until a company finds a way to convert them into profits -- but there's good news on that front, too. While Brigantine acknowledges that there is little chance UD will produce "sustainable" profit before 2012, the company already looks poised to begin producing real, concrete cash profits.
After steadily reducing its rate of cash-burn, UD turned cash-flow positive last quarter. With minimal capital spending requirements at its business, a large bump in revenue holds the potential to unleash a torrent of free cash flow as the trend of rising cash-from-ops continues. Based on a "discounted" analysis of the firm's likely cashflows, Brigantine now values UD at $56 per share -- nearly 40% greater than where the shares trade today.
Foolish final thought
Brigantine may not be right about the exact dollar figure, of course. Indeed, the analyst's record on CAPS shows that it has anything but a firm grasp on trends in the display industry. Brigantine was right about traditional LED-maker Cree (NAS: CREE) underperforming the market back in January, but very wrong about display-glass maker Corning (NYS: GLW) performing similarly last summer.
Still, the trend does look promising here. If UD can keep its capital spending under control, while expanding its top line and continuing to widen gross margins on its product, I think this erstwhile cash-burner could soon evolve into a real free cash flow-powerhouse -- and a profitable investment even after this week's rapid run-up.
At the time thisarticle was published The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Corning, Apple, and Universal Display, and recommended creating a bull call spread position in Apple.Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 402 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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