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transaction and earnings preview ?4

14:54 19-Oct-15

LG Display is buying the phOLED lighting segment of LG Chem's business.  This is one more piece of evidence in support of my claims that LPL is, for the time being at least, a better way to profit from the continuing emergence of phOLED technology than OLED stock.  With the addition of the lighting business, LG Display will now embody all the major growth factors for phOLED technology that UDC does, which I see as:

• Televisions: the clear lead here is now obvious, and LG Display will be ramping up production in the 4th quarter and in 2016.  As it does, the product sales should start to see significant volume in commercial displays, like signs and professional monitors, where new deals should enable substantial margins.  In fact, Gizmodo reports that LG's TVs are better than professional monitors from Sony costing $50,000!  As volume increases, consumers sales should become increasingly prevalent as production costs and price points continue to drop.
• Flexible/Mobile Displays: the latest evidence of LGD's lead in this category is likely to be the new Droid Turbo 2 phone, to be introduced on October 27th.  LG's G-Flex 2 already demonstrated this capability earlier this year, and I strongly suspect that LG Display will be supplying the screens for Motorola's new flag ship.
• Lighting: LG is the clear leader here, with the only mainstream products on the market, which have been available for over a year and are resold through the Acuity brand. 

While it's true that UDC owns the patents for the phOLED emitters they are just a small part of the value chain; by contrast, an investment in LPL helps to protect against the possibility of a drop-in replacement for the material and has government support. 

The real difference, though, continues to be in relative valuations:

	OLED	LPL
Dividend	None	2.2%
GAAP Trailing P/E	230	5.5
Non-GAAP P/E	43.2	5.3
Price to Book	3.66	0.69
Price to Sales	9.13	0.30

LG management has made comments about amending this situation.  One option could be a dividend increase, as LG Display has been largely cash flow positive in recent years.  However, I think a more likely and effective option might be to spin off the newly concentrated phOLED businesses from LG Display in a new stock offering in order to generate even more cash to reinvest in production.  That could be the real reason for the transfer.

I think, such an announcement would be most likely to occur with the year-end report, but we might hear something about it as early as the next earnings report, which is scheduled to occur before market open on October 21st.  On average, analysts are expecting earnings of 29 cents per ADR on revenue of $18.5 billion.  Dollar strength vs the Korean Won should function as a tail wind for these numbers, though so far that is regressing in the fourth quarter, where average expectations are for an increase to revenue of $20.6 billion.  Given my multi-year outlook on LG Display, I continue to be less concerned about the quarterly numbers than am with continued evidence of manufacturing progress.

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