The Long Case For AU Optronics

| About: AU Optronics (AUO)

Summary

AUO sells at very low multiples.

AUO is positioned to grow from trends in Ultra HDTV and AMOLED technology.

AUO is producing at 100% capacity and is considering expanding capacity.

AU Optronics Corporation (NYSE:AUO) is one of the top manufacturers of TFT-LCD panels in the world with a market share of 16.7% in large-sized panels. AUO owns more than 13,300 patents worldwide, as well as over 20,100 patent applications. AUO is recognized as a leader in both Ultra HDTV and AMOLED technology. Going into 2015, both of these technologies offer opportunities for AOU to grow revenue and expand margins.

Television sales recorded in the U.S. for Thanksgiving week were very encouraging for AUO. Reversing trends from previous years, consumers snapped up big screen TVs in record numbers.

Sales grew by more than 35 percent in the 50-64" screen sizes. In fact the 50-64" size range moved into the mainstream of holiday demand, accounting for more volume than the 33-49" segment or 32" TVs. The 65" and larger TVs had most effective promotions ever, as volume more than doubled.

Sales should continue to rise. According to DigiTimes, both Sony (NYSE:SNE) and Panasonic (OTCPK:PCRFY) are conducting very active promotions for Ultra HD LCD TVs which should result in increased orders for AUO.

AUO is one of only two companies in the world that have the capacity to produce UHK, 4K curved LCD panels. For the full year 2015, curved TV sales could exceed 5 million units, most of which will adopt UHK panels. Because production requires very sophisticated technology, there is a barrier to entry for other companies contemplating mass producing UHK panels.

The AMOLED display market for smartphones has seen rapid growth in the past year, which is likely to continue reaching $22 billion by 2018. Increasing adaptation of AMOLED displays in smartphones is one of the major drivers in this market. The unique features of AMOLED displays such as high resolution and ultra-high clarity help in enhancing the user experience.

Market research shows that the car display market will surpass $8 billion by 2020 as carmakers continually add more displays to the driver's cluster. AUO targets 30% year to year shipment growth as it retains its number three position in this segment with a 20% market share.

TV sales will continue to be the major driver for demand for AUO and there has been a bit of a roller coaster ride provided by analysts on what the future will bring. Credit Suisse downgraded AUO in October, forecasting weaker demand for flat panels. In the same month, BofA/Merrill downgraded Corning (NYSE:GLW) forecasted slowing TV sales. Last week, Citi upgraded Corning, citing stronger TV sales, as noted above in this article.

AUO reports that its fabs are running at 100% capacity and that it is carefully considering adding capacity to meet customer demand. It has altered its utilization to increase production of 50" and above panels in order to maximize capacity value and profitability raising operating margin from 3.8% to 8.2%, far exceeding its peers.

Because of the wild swings in flat panel supply and demand, AUO sells at a very modest valuation. The current market price values the stock at less than book value, .38 of sales and a PEG of .29. The consensus estimated growth rate going forward is almost 40%. The company has beaten earnings estimates consistently, quarter after quarter. The chart indicates that the price is currently in an uptrend.

AUO is active in a very competitive field with ever changing factors that influence supply and demand. Its position could also be influenced by world political events and fluctuations in currencies. There are other risks associated with investing in this stock and they should be carefully considered by reading material presented by the underlying company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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