LG Display: Going From Bad To Worse (NYSE:LPL)

UHD 4K Smart Tv On White Background

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LG Display (NYSE:LPL) was expected to post some pretty awful numbers, but the magnitude of the deterioration still raised some eyebrows. Q3 was better than Q2 in some ways, as expected due to seasonality, but LPL also suffered significant setbacks that were not anticipated. All in all, LPL seems to have gone from bad to worse in its latest earnings report. Why will be covered next.

Losses mounted at LPL

The quarterly numbers have quickly deteriorated in 2022. LPL still managed to end Q1 with a small profit, but it fell into the red in Q2 after seven consecutive quarters with a net profit and the losses got bigger in Q3. In fact, net loss more than doubled QoQ to KRW774B in Q3, which is equal to $0.54B using an exchange rate of 1:1422 for the U.S. dollar, down from a net profit of KRW464B a year ago. The table below shows the numbers for Q3 2022.

Note how the sequential decline in the bottom line came in spite of an increase in the top line. Q3 revenue increased by 21% QoQ, although it still declined by 6% YoY to KRW6,771B or $4.76B. Gross margin barely managed to stay above water at 0.8% and operating margin was minus 11.2%. EBITDA declined by 41% QoQ and 77% YoY to KRW391B or $0.27B in Q3 2022, down from KRW662B in Q2 2022 and KRW1,696B in Q3 2021.

The increase in losses negatively affected the balance sheet. Cash and cash equivalents totaled KRW3,264B or $2.3B in Q3 2022, down from KRW3,669B in Q2 2022 and KRW4,209B in Q3 2021. In contrast, total debt rose to KRW15,291B or $10.75B in Q3 2022, up from KRW13,987B in Q2 2022 and KRW13,451B in Q3 2021. Net debt-to-equity ratio reached 84%, up 13 percentage points QoQ and 21 points YoY. Liabilities-to-equity ratio reached 181%, up 19 percentage points QoQ and 24 points YoY.

(Unit: B KRW)

Q3 2022

Q2 2022

Q3 2021

QoQ

YoY

Revenue

6,771

5,607

7,223

20.76%

(6.26%)

Gross margin

0.8%

4.9%

18.1%

(410bps)

(1730bps)

Operating margin

(11.2%)

(8.7%)

7.3%

Operating income (loss)

(759)

(488)

529

EBITDA

391

662

1,696

(40.94%)

(76.95%)

Net income (loss)

(774)

(382)

464

Source: LG Display

Headwinds remain and some new ones showed up for LPL

The top and the bottom line fell short of expectations and the table below helps explain why. Keep in mind that LPL gets a lift from seasonality as the company moves closer towards the holidays. Accordingly, Q3 guidance called for shipments of display panels to increase by mid-single digits QoQ and average selling prices or ASP to increase by 20% QoQ. However, shipments instead declined by 2% QoQ and ASP increased by 19% QoQ to $675 in Q3, less than the $750 a year ago.

Capacity (M m²)

Shipment (M m²)

ASP/m²

Q3 2022

10.5

7.7

$675

Q2 2022

10.9

7.8

$566

Q1 2022

11.5

8.1

$660

Q4 2021

11.6

9.4

$806

Q3 2021

11.9

8.4

$750

Q2 2021

11.6

8.9

$703

Q1 2021

11.2

8.5

$736

Q4 2020

10.8

8.7

$790

Q3 2020

10.8

8.3

$706

Q2 2020

9.3

6.7

$654

Q1 2020

9.7

7.0

$567

Management provided some color as to why results fell short. LPL continued to suffer from headwinds like the current decline in prices for LCD display panels, but there were unexpected surprises as well. LPL has benefited for some time from growing shipments and demand for OLED display panels, particularly for OLED TVs, which increased by 20% YoY in the first half of 2022, but this pocket of strength started to falter in Q3. From the Q3 earnings call:

“With worsening macro economy in Q3, panel demand fell more sharply than expected, with sluggish sales by set makers, large inventory reduction, and stronger standards for inventory operations. In Europe, the biggest market for OLED TV, consumer confidence contracted rapidly following the Russia-Ukraine war and energy crisis, pulling down actual set sales to the negative territory. Demand reduction has been most pronounced where the company is strongest in high-end TV and IT and our business performance in Q3 underperformed our guidance.”

A transcript of the Q3 2022 earnings call can be found here.

Guidance calls for shipments to increase by low-to-mid single digits and ASP by mid-to-high single digits in Q4, both QoQ.

“Let me now move on to guidance for Q4 2022. Market volatility and uncertainties are expected to persist. But the effect of seasonality in response to year-end demand in Q4 will push up area shipments QoQ by a low to mid single-digit. ASP per square meter is also expected to climb up by mid to high single-digit, thanks to increase in new mobile product launches.”

In comparison, shipments increased by 11.9% QoQ and ASP by 7.5% QoQ a year ago. Keep in mind that the fourth quarter is the strongest of the year for LPL from a seasonal standpoint due to the holiday shopping season.

The stock continues its descent

It’s worth mentioning that the stock has done relatively well in October, having gained 7% in one month. The stock rallied in recent weeks and a good Q3 report could have given the stock a much-needed boost. Unfortunately, that did not happen. The stock has resumed its decline and it’s now down 56% YTD. The chart below shows how the stock has fallen in 2022.

LPL chart

FINVIZ

The stock even appears to be in a downtrend. Note the lower highs and lower lows. Trendlines can be drawn to connect the lows and the highs, revealing a channel through which the stock has moved lower. The stock has respected the boundaries imposed by this channel and since the channel is heading down, the stock is heading down as well. The trend is clearly down.

Why LPL may still draw interest despite all the gloom and doom

Nevertheless, it’s worth mentioning that the recent bounce may not have been by accident. The stock reached a 52-week low of $4.08 on September 30, but then proceeded to bounce. In doing so, the stock came within pennies of matching the March 2020 low of $4.01, which was in turn a multi-decade low.

The last time the stock got to current levels, the stock managed to rally. Some may be betting that will happen again with the stock currently at $4.44. The stock has also pretty much completed a 100% retracement of the rally starting from the March 2020 lows to the April 2021 highs, which some traders might consider a signal to go long.

Another reason why people may be drawn to LPL likely has to do with valuations. For instance, the stock is valued at 0.35 times book value. There are those out there who specifically look for stocks that trade below book value as they consider these stocks undervalued for that reason. On the other hand, one could argue these multiples are there for a reason and that’s because LPL is under stress with the company losing money. The table below shows some of the multiples LPL trades at.

LPL

Market cap

$3.31B

Enterprise value

$12.03B

Revenue (“ttm”)

$19,180.6M

EBITDA

$2,416.5M

Trailing P/E

N/A

Forward P/E

N/A

PEG ratio

P/S

0.16

P/B

0.35

EV/sales

0.63

Trailing EV/EBITDA

4.98

Forward EV/EBITDA

5.49

Source: Seeking Alpha

It’s probably also worth pointing out that LPL paid out a dividend of $0.26 earlier this year, which gives LPL a yield of 5.9%. This could be seen as another plus for LPL. On the other hand, it’s doubtful whether LPL will be able to continue to pay a dividend with the company losing money. The odds the dividend gets dropped are very high.

Investor takeaways

LPL got some good news in Q3. For instance, COVID-19 lockdowns in China, which were a major factor in Q2, eased up in Q3. In addition, LCD manufacturers, particularly in China, continue with their efforts to bring some semblance of stability to the LCD market by cutting back on production output in order to boost prices.

However, the few positives were overshadowed by the many negatives. Not only is there still no solution to old problems like the imbalance between supply and demand in the LCD market, but problems have popped up in the OLED TV segment. Until recently, this market segment bucked the trend by outperforming.

For instance, sales of OLED TVs grew by 20% YoY in the first half of 2022, even though the market for TVs declined by 10%. The OLED market is considered one of LPL’s strengths, if not the biggest one, especially with LPL having a virtual monopoly in large OLED TV panels. However, it now seems the OLED TV market is not so resilient after all as once assumed.

Europe is LPL’s biggest market for OLED TVs with a share of 45%. The economic downturn, made worse by the war in Eastern Europe and its after-effects, seems to have greatly hurt consumer sales, OLED TVs included. OLED demand could recover, but as of right now, LPL has basically lost the one trump card it could count on.

I am neutral on LPL as stated before in a previous article. It’s understandable if there are people out there who are thinking about whether LPL is a buy. Valuations are low in certain aspects, even if LPL is losing money. The stock price is close to the lowest it’s been in decades. On the other hand, anyone considering LPL has a lot of hurdles to overcome.

Not only is LPL in the red, but it could stay there for quite some time with the display market set up the way it is. Panel demand is going down and so too are prices. The LCD market has not been able to find a permanent solution for the imbalances causing problems. The European economy looks more likely to get worse than better, which suggests LPL has not seen the last of the setbacks in the OLED market.

The income statement is not the only thing in need of improvement. The same can be said of the balance sheet. The balance sheet got worse in Q3 and it will get even worse if the near-term outlook is any indication. Q4 guidance was disappointing to say the least, especially since it is the holiday season and seasonality is in LPL’s favor. It’s worth wondering what LPL will do when seasonality starts to turn against it after Q4.

Trends do not last forever, but the current chart patterns suggest the stock has yet to hit bottom. The stock did bounce off of the March 2020 low at the end of September, but it has since lost steam and appears to be getting ready to challenge the multi-decade low once more. It’s possible the stock will break through this time, especially with losses mounting and the balance sheet expected to get worse.

Bottom line, there are simply too many issues out there that need to be resolved. While a few may be willing to take a gamble on a stock that is priced as low as its been in decades, most are unlikely to do so with LPL having so many problems in need of fixing. LPL has yet to make a truly compelling case in favor of going long. As long as this is the case, LPL is a pass.

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