LG Display Looking For A Fresh Start After Dismal Q4 And FY Earnings (NYSE:LPL)

LG Display (NYSE:LPL), a leading manufacturer of display panels, put the finishing touches on this past year with the release of the Q4 report on January 27. In general, 2022 was a year to forget as things went from bad to worse for LPL. For instance, LPL topped 2022 off with a huge loss in Q4 after a small profit in Q1. However, despite the doom and gloom, the stock itself has done fairly well recently. Why will be covered next.

A bad end to what was a bad year for LPL

LPL probably could not wait for 2022 to end. The numbers got worse as the year went by. LPL ended Q1 with a small profit, but LPL has been in the red ever since. The numbers have been getting worse and that was true once again in Q4. Net loss jumped to KRW2,094B, which is roughly equal to $1.7B using an exchange rate of 1:1230 for the U.S. dollar, down from a net profit of KRW180B a year ago. Operating loss increased as well to KRW876B due to lower shipments of IT panels, lower prices for display panels and production adjustments to counter excess inventory.

However, note that if it wasn’t for a KRW1,330B asset impairment charge related to the OLED business, Q4’s net loss would have been closer to Q3’s net loss of KRW774B at KRW764B. On the other hand, the bottom line results are still a disappointment considering the top line increased by 7.8% QoQ, which can be attributed to seasonality with Q4 being the holiday shopping season.

Q4 revenue declined by 17% YoY to KRW7,302B or $5.94B. EBITDA declined by 47% QoQ and 87% YoY to KRW209B or $0.17B in Q4 2022, down from KRW391B in Q3 2022 and KRW1,645B in Q4 2021. Gross margin fell into negative territory for the first time since Q1 2009. The table below shows the numbers for Q4 2022.

(Unit: B KRW)	Q4 2022	Q3 2022	Q4 2021	QoQ	YoY
Revenue	7,302	6,771	8,807	7.84%	(17.09%)
Gross margin	(0.3%)	0.7%	14.9%	(100bps)	(1520bps)
Operating margin	(12.0%)	(11.2%)	5.4%	(80bps)	(1740bps)
Operating income (loss)	(876)	(759)	476	–	–
EBITDA	209	391	1,645	(46.55%)	(87.29%)
Net income (loss)	(2,094)	(774)	180	–	–

Click to enlarge

Source: LG Display

With the Q4 numbers, so too are the numbers for the whole year. Revenue declined by 12% YoY to KRW26,152B or $21.26B. Net loss was KRW3,196B or $2.6B, down from a profit of KRW1,334B or $1.08B in 2021. EBITDA was KRW2,472B or $2.01B, a decline of 63% YoY. Gross and operating margins fell by double-digit points.

(Unit: B KRW)	2022	2021	YoY
Revenue	26,152	29,878	(12.47%)
Gross margin	4.3%	17.8%	(1350bps)
Operating margin	(8.0%)	7.5%	(1550bps)
Operating income (loss)	(2,085)	2,231	–
EBITDA	2,472	6,731	(63.27%)
Net income (loss)	(3,196)	1,334	–

Click to enlarge

The balance sheet saw changes as well. Cash and cash equivalents totaled KRW3,547B or $2.88B in Q4 2022, down from KRW4,285B in Q4 2021, but up from KRW3,264B in Q3 2022. Total debt was KRW14,991B or $12.19B in Q4 2022, up from KRW12,664B in Q4 2021, but down from KRW15,291B in Q3 2022.

LPL’s financial health deteriorated as a consequence. For instance, net debt to equity ratio reached 101%, up 17 percentage points QoQ and 54 points YoY. Liabilities to equity ratio reached 215%, up 34 percentage points QoQ and 57 points YoY. The current ratio fell to 68%, down 11 percentage points QoQ and 26 points YoY.

Why the market has hope for LPL

The income statement and the balance sheet got worse, but the stock still managed to end the day after the earnings release up 3% to $5.79. In fact, the stock overtook the 200-day moving average by doing so. The latest gains come on top of the ones LPL has accumulated since early October. The chart below shows how LPL has appreciated by 42% after bottoming at $4.08 on September 30. Note how the stock had some trouble getting past $5.50, but the stock appears to have overcome resistance in this area.

The market appears to be looking past the current numbers in anticipation of better times ahead. This optimism is in great part backed by ongoing efforts by display manufacturers to stabilize prices in the display market by reducing output. This has led to lower fab utilization, but it has also resulted in an improvement in pricing for display panels, a turnaround from when prices were in free fall.

LPL has done its part. LPL ended LCD production late last year at one of its fabs in Korea and another one in China will reduce capacity by 50% in 2023. If prices have bottomed or are close to it, then that would be a good news for an industry where a supply glut leading to falling prices has arguably been the biggest problem over the years.

LPL has resorted to various initiatives that it believes will help trigger a turnaround in H2 2023. From the Q4 earnings call:

The company expects about KRW1 trillion cost reduction in Q1 from the large scale business rationalization underway from Q4 such as active inventory control, LCD TV downsizing and OLED TV production adjustments. In addition, new capacity utilization for smartphones and strong improvement in fundamentals will improve performance quarter-to-quarter and help achieve a turnaround in the second half of the year. In terms of investment, only the minimum ordinary investment will be made along with the investment in order-based projects already agreed with customers. CapEx for the year will be around KRW3 trillion on a cash-out basis.”

A transcript of the Q4 2022 earnings call can be found here.

Still, H1 2023 is expected to be difficult for LPL.

With market volatility remaining high, sluggish demand for panels is expected to last into the first half of the year. The market situation where panel shipments fall short of actual sales is expected to persist in the first half. But the panel inventory issue is likely to be mostly addressed in the first half regardless of the real demand for sets, thanks to intense production adjustment across the industry. This will hopefully return the industry-wide inventory to healthy levels in the second half.”

Basically, the situation is grim with slowing demand and will remain so at least through H1, but LPL is optimistic of a turnaround starting in H2 2023.

Why LPL may be drawing interest

A possible turnaround later this year has helped the stock, but there are other factors as well. For instance, some might decide it’s worth taking a shot at LPL with multiples where are. For instance, the stock is valued at 0.48 times book value. This could be of interest to those who feel that stocks trading below book value are undervalued. The table below shows some of the multiples LPL trades at. Note that Q4 numbers have yet to be incorporated.

	LPL
Market cap	$4.12B
Enterprise value	$16.34B
Revenue (“ttm”)	$19,180.8M
EBITDA	$2,432.2M
Trailing GAAP P/E	N/A
Forward GAAP P/E	N/A
PEG ratio	N/A
P/S	0.22
P/B	0.48
EV/sales	0.85
Trailing EV/EBITDA	6.72
Forward EV/EBITDA	6.58

Click to enlarge

Source: Seeking Alpha

On the other hand, one could argue there’s a good reason why LPL trades far below its book value. It reflects the financial stress LPL finds itself at. LPL may not be in danger of going out of business, but it’s also true that LPL is a company losing money with an uncertain outlook, not to mention lots of debt to service.

Note that LPL is credited with a dividend yield of 4.5% because it paid out a dividend of $0.26 last April, which may also draw interest from investors. However, the dividend was possible because LPL ended 2021 with a sizable profit. It’s highly unlikely LPL will pay a dividend in 2023 after what most will agree was a very bad year.

Investor takeaways

Some may look at LPL as a contradiction. On the one hand, LPL is in the midst of a deep slump with the company posting a net loss in the last three quarters. LPL lost $1.7B in 2022 with the display market dealing with several problems, including weakening demand and excess inventory. On the other hand, the stock has done quite well recently, having gained 42% in almost 4 months and 17% YTD.

The industry is dealing with serious problems as shown by the latest earnings report from LPL, but there is increasing optimism that prices in the display market have bottomed or are close to it. This is due to efforts on the part of panel manufacturers, including LPL, to bring supply in line with demand in order to halt the slide in prices for display panels that have hurt the industry. Some even believe the market will rebound in H2 2023, something that LPL agrees is possible in its outlook.

However, there’s some uncertainty associated with this outlook. And even if there is a turnaround, history tells us that it won’t be long before panel manufacturers revert to old habits. This includes overproducing and depressing the market for display panels, setting the market back to square one. This cycle has been repeated again and again in previous years and there are no signs that a solution to this problem has been found.

I am neutral on LPL. There were some positives in the Q4 report. For instance, OLED revenue reached 52% in Q4 and 40% for all of 2022, up from 32% in 2021. Nevertheless, the negatives outnumbered the positives. It’s possible that panel manufacturers, particularly those in China, have learned their lesson that they need to keep supply and demand in balance, but the odds are against it. What is happening in the display market has happened several times before and each time companies went on to repeat the same mistakes they made before.

LPL has raised hopes with its various initiatives to cut costs and grow the business so that better times are ahead, but history suggests it is prudent to remain cautious regarding any talk of a turnaround. The reality is that LPL is a company deep in the red, on top of billions in debt on its balance sheet. While multiples may seem low in several metrics, there is a reason why multiples are where they are. It’s because LPL is faced with serious problems that have yet to be resolved.

Bottom line, the stock could go higher as long as panel manufacturers remain disciplined and do their best to put the industry on a solid footing. If this happens, long LPL could become a winner. LPL is after all valued at, for instance, just 0.22 times sales. But a look back at history suggests this is unlikely. If relevant players revert back to old habits, as history suggests they will, then staying neutral will turn out to have been the right move all along.