HOLDINGS UPDATE: Raising target price on this Disruptive Technology company as it knocked it’s earnings report out of the park
In this Alert:
- Universal Display (OLED) smashed consensus expectations for 1Q 2017 on both the top and bottom line, delivering EPS of $0.22 per share, well ahead of expectations calling for a break even quarter.
- As such, we are raising our price target on OLED from $100 up to $125 as we are just now beginning to see the expected ramp up in capacity for the company’s organic light emitting diode displays.
After last night’s market close, Disruptive Technology company Universal Display (OLED) smashed consensus expectations for 1Q 2017 on both the top and bottom line. For the quarter, Universal Display delivered EPS of $0.22 per share, well ahead of expectations calling for a break even quarter, and compares to $0.04 in the year-ago quarter. The company’s 1Q 2017 revenue rose 87 percent year over year to $55.6 million vs. the $33.5 million consensus and $29.7 million in the year-ago quarter. Management also upsized their outlook for 2017 calling for revenue of at least $260-$280 million, which is not only well ahead of the $247 million consensus view for 2017, it puts Universal’s revenue on a path to growth 30-40 percent this year. We chalk this better than expected outlook to the growing pipeline of organic light emitting diode industry capacity expansion that is being led by new product launches that are adopting organic light emitting diode displays.
Given the company’s revised guidance and recent propulsive to deliver better than expected results given a number of favorable demand factors for organic light emitting diode displays, we expect earnings expectations to be reset higher this morning, most likely somewhat near EPS of $1.70 on revenue of $270 million for this year vs. the consensus of $1.43 on revenue of $243 million ahead of last night’s earnings. Odds are those Wall Street analysts that were below the consensus for 2018 (EPS of $2.25 on revenue of $325 million) will also bump those forecasts higher. It also most likely means price targets on OLED shares will move higher, lifting the current consensus above the $95 level.
In our view this prompts two logical questions — what are we doing with our price target and our rating on OLED shares?
First, there is no doubt OLED shares have been a strong, strong performer this year as they are up more than 95 percent since the start of 2017 compared to 12.7 percent for the Nasdaq Composite Index. With ramping capacity over the coming year, we certainly see rising demand for the company’s chemicals and an expanding market for its intellectual property and licensing business, which means expanding revenue and earnings over the coming quarters. The company’s upward revision to its 2017 expectations gives us greater confidence in that, and we suspect more data that points to expanding industry capacity and more applications adoption OLED display will only do more of the same in the coming months.
The challenge in assessing exactly how fast Universal’s earnings will grow in 2018 and 2019 is due in gauging commercial revenue for the company’s chemicals, which are tied to industry capacity not just coming online but moving from startup to commercial volumes. That said, as Apple (AAPL) and others adopt organic light emitting diode displays and replace existing display technologies across smartphones, TVs, wearables and other applications, we strongly suspect continued revenue and earnings growth to be had at Universal Display.
- We estimate the company will grow its bottom line at a compound annual growth rate of 35 to 45 percent between 2016-2018/2019, which equates to a PEG ratio of 1.1-1.3 using 2018 consensus expectations of $2.25 per share in earnings.
- Applying a PEG ratio of 1.5 to 2018 expectations derives a new price target of $125, which even after today’s move higher offers sufficient upside to keep our Buy rating on OLED shares.
- Should Universal Display continue its meet or beat track record when its comes to quarterly results, we could see even further upside to that new price target.
On the housekeeping front, Universal Display closed the March quarter with $340 million of cash, short term and long term investments for approximately $7.20 of cash per share. The company also announced the Board of Directors approved a cash dividend of $0.03 per share on the company’s common stock, payable on June 30th to all shareholders of record as of June 15.
