Universal Display

While Universal Display Corp may seem inexpensive after its substantial price decline over the past year, we've limited its rating to 3 stars to account for the possibility that it may represent a value trap. The stock currently trades at a 23% discount to our quantitative fair value estimate of $104.15 per share; however, some caution is warranted due to this estimate's medium uncertainty rating.

The firm's balance sheet strengthens our estimated fair value. Low leverage mitigates financial risk, potentially boosting a firm's value. Reflecting the firm's leverage is its current ratio of 8.5, which ranks in the top 10% compared with peers globally. We have little concern about this company's ability to cover near-term obligations, thanks to its relatively high current ratio; this could be a compelling signal during times of distress, which contributes to our view that shares are cheap.

Alternatively, the company's valuation metrics are potentially concerning. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. The firm's enterprise value to market value ratio of 0.9, for example, falls in the bottom 30% globally. The market value of equity makes up a large fraction of enterprise value, indicating that shares have sharply risen, or that the company has a "lazy" balance sheet that is underleveraged. Despite our favorable price/fair value ratio, this characteristic is a negative attribute.

The company's narrow quantitative moat rating indicates it could outearn its cost of capital and maintain robust margins for 10 years or longer. Its moat is bolstered by its strong financial health, which indicates low near-term bankruptcy risk.