Universal Display Corp (OLED) has beaten the Zacks Consensus Estimate in four of its last five earnings reports and recently reported strong guidance. Today, OLED is a Zacks Rank #2 (Buy), and it is the Bull of the Day.
Why A Zacks Rank #2 (Buy)
The Bull of the Day is not an article that is designed to show a stock that is going up the most on any one given day. It is about showing how the Zacks Rank works and the positive attributes that the highly ranked stocks have.
Normally we write about Zacks Rank #1 (Strong Buy) stocks for the Bull of the day, but I wanted to highlight a stock that I think has a number of positive catalysts that could drive the stock price higher.
Company Description
Universal Display Corporation is a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies and materials. OLEDs are thin, lightweight and power-efficient solid-state devices that emit light, making them highly suitable for use in full-color displays and as lighting products. OLED displays are capturing a growing share of the flat panel display market.
Most Recent Quarter
OLED reported a strong 2Q14 beating the Zacks Consensus Estimate by $0.04 in posting a 10% positive earnings surprise. The company reported revenues of $64M when the street was calling for $62M in the quarter. The $2M top line beat translated into a 3.3% revenue surprise.
Tight In The Shorts?
I took a look at the short interest in this stock and was surprised to see at a great short squeeze candidate. On 5/30 the absolute number of shares sold short was at a high point over the last twelve months. 9.2M shares had been sold short as of that date, and with 680K shares in daily volume that meant the shorts needed 13.5 days to cover.
On 6/13 the reported number of shares sold short ticked down by 50K, but days to cover ballooned to 15.5.
The most recent data is from 7/15 and it shows there are 8.5M shares sold short with days to cover standing at a brisk 13.6. This implies that a even a small move up in the stock could produce a pretty large short squeeze.
The chart above shows the number of shares sold short over the last twelve months.
Strong End Markets
It is pretty widely known that smart phone and tablet sales continue to improve. OLED is penetrating these markets, but there are some places that are more 'up and coming' and OLED is targeting them in the next phase of growth for the company.
Televisions are getting a lot more attention, and if you watched any of the PGA Championship you were bombarded by commercials about a screen that bends. That is not anything new, but there are many that say the cycle for upgrades in new TV is very much overdue.
The other spaces that I see that could be a big source of growth for OLED are lighting, flexible solutions and of course wearables. Wearables hold the most immediate promise as the OLED screen is a perfect match for that platform. The OLED powered screens require less battery power, which most wearables will be challenged with from a design perspective.
Prior To The Most Recent Beat
Prior to the most recent beat, OLED blew away the number. The company posted earnings of $0.09 when the Zacks Consensus Estimate was calling for $0.08. The seven cent beat translated into a 350% positive earnings surprise. Revenue came in $7M ahead of estimates for a 21% positive revenue surprise. Given the sold quarter it is no surprise that investors bid shares of OLED up by 16.4% in the session following the release.
OLED Sees Estimates Moving Higher
The Zacks Consensus Estimate for 2014 for OLD has been pretty volatile this year. We came into the year with a $1.18 number but by the second month of the year the estimate had slipped down to $1.05. Over the next two months we saw a recovery to $1.10 in April, but the gains were given back and in July the Zacks Consensus Estimate was $1.00. Following the strong earnings report, the estimate has kicked back higher to $1.07 and is now headed in the right direction.
The 2015 Zacks Consensus Estimate has also seen a good amount of volatility, as the year started with a $1.85 number and after bottoming out at $1.57 in July, we see estimates moving higher to $1.59.
As estimates move higher, the stocks Zacks Rank is also likely to move higher.
Valuation
The valuation for OLED is a little rich, but I want to see that in a growth stock. The trailing PE of 30x is 50% higher than the 20x industry average, and the 28x forward PE carries nearly the same premium to the 18x industry average. The price to book of 3.3x is well above the 2.3x industry average and the price to sales metric of 7.8x head and shoulders over the 1.2x industry average. So why the premium on all the metrics? One could point to this year and next years' visibility. The company is expected to have revenue growth of 38% this year and 28% next, and that compares very favorably to the 11.6% and 12% growth numbers for the industry average.
The Chart
Normally I show the price and consensus chart, but I felt like the 12 month EPS chart tells a better story. Zacks is all about rising estimates, and if you believe that earnings are a primary driver for stocks then you already agree with the basic principles behind the Zacks Rank. When looking back at earnings and how the stock moved in relationship to the, you can see that the stock had a few period of getting ahead of the earnings. Now it appears that earnings growth is about to really lift the stock higher, as the Zacks Consensus Estimate for 2015 and 2016 show significant growth ahead.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
