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New AMOLED-related pick list stock +4

I'm adding LG Display (LPL) to my pick list.  This is a firmer pick than most on the list, but I am characterizing it as such for two reasons:
  • Most of the analysis relating to this stock has already been published as part of my OLED coverage.  Thus, there may not be much in the way of updates in the near term.  I will give a heads up before I make any of the analysis in this message public.
  • There is probably plenty of time to get in.  The stock is very lightly followed, and reports irregularly.  As with OLED, the main catalysts are probably in the latter half of the year.  These include the production capacity build-out that I've been discussing for a long time, and the resumption of a year-end dividend, currently representing over 3% yield.

Nonetheless, despite clear signs of a turnaround in the business, LPL is back down to its 1-year base, after climbing briefly to challenge multi-year highs following CES.  This is probably due in part to recent U.S. dollar strength, but note that currency is a double-edged sword.  A strong dollar depresses LPL shares in the short term due to arbitraging from institutional traders, and reduction of the nominal yield.  What's more important, though, is that a strong dollar represents a tail wind for the business, since costs are denominated in won, but international deals and sales are in dollars. 

Televisions

I also believe that LG will cut licensing deals for its WRGB TV architecture.  This statement may be the first hint on that front.  Licensing benefits LG in that it helps generate cash to further capitalize on its first mover advantage, and will help to lessen the media FUD from other manufacturers on inferior, but still competing technologies (see the section on QDTVs).  The latest iteration of this is HDR (high dynamic range) television, which has recently been talked up by competitors despite ~zero content support.

Competitors have a powerful incentive to cut a deal as well, in order to get a head start on what is clearly the current top-end technology.  LG sold 77,000 AMOLED TVs in 2014 at elevated prices, indicating that consumers appreciate the difference in quality.  Sales clearly ramped towards year-end.  That may have been a factor in the breakout Q4 report from Best Buy, which had an exclusive with LG on these models, and cited television sales as one of two main drivers for the quarter.  With sales clearly production-constrained, being second to market will probably still hold value.  Though competitors clearly will want to minimize their costs, I would expect LG to crack this nut by giving somewhat preferential initial licensing terms, preferably to a smaller partner like AUO.  A cascade of other deals should then follow with larger entities such as JOLED.

Mobile

The mobile division of LG Display has value, as well.  While I continue to believe that sourcing the Apple Watch screens won't be much of a fundamental driver, it has undeniable market sentiment and media value.  The G-Flex2 seems like a more important development to me, as I think there is major appeal in more durable smart-phone.  The device also represents a lead in the push towards truly flexible electronics.  As I've mentioned before, perhaps we'll see some cross-licensing to help make this happen faster.

Although I've appropriately highlighted televisions as the bigger growth driver for Universal Dispaly, because of the material usage, flexible electronics is probably an even bigger long term growth driver for LG Display.  It's understandable that LGD is currently prioritizing televisions because of its clear technology lead.  However, if we look more than  a couple of years out, it's easy to predict that flexible, unbreakable mobile devices will be a must-have with consumers, whereas good enough will continue to compete with best in televisions.

Summary

I think now is a good entry point for LPL because of recent U.S. Dollar strength.  As we saw with ABB, pricing opportunities created by currency fluctuation typically don't last.  I think the next catalyst for LG Display will be licensing of its television architecture.  There's no telling when that may occur, though my guess would be that it is probably weeks, if not months away.  Continued resistance on this point from other manufacturers is the main risk factor, but I think resistance is futile, as it would have to be industry-wide, and LG can continue to go it alone in the meantime.  To that end, continued ramp of LGD's production capacity in the second half, followed by a dividend, and flexible device success will act as further catalysts.