Wednesday, June 27, 2007

AUO Confirmation

Here are three more articles that support not only a return to profitability, but also an increased stock price for AUO.

Digitimes says

Amid rising panel quotes and shipment increases, AU Optronics (AUO) and Chi Mei
Optoelectronics (CMO) will likely report sequential sales growth of more than 5%
and set records again in June, according to the Chinese-language Commercial

Shipments of the two panel makers are to grow 5-7% sequentially during
the period, the paper noted.

With shipments growing on increased sales prices and increased margins...what's not to like?

The next article is titled "Strong Demand from LCD TVs and Mobile Applications Drives Asia Pacific Flat Panel Display Market". This article details how the industry had revenues of $67 billion in 2006 and predicts growth to $122.8 billion by 2013.

Finally, the last article shows that export orders for Taiwan rose on strong demand for notebooks, PCs, and outsourcing. They might as well said LCD Panels, LCD Panels, & LCD Panels.

The Digitimes article will not last for free for too long. Their site sends it to a subscriber only archive site after only a couple days.

Supply cannot meet the demand for LCD Panels and what it means for AUO

I submitted the following to today. More information detailing the supply/demand conundrum in various media outlets. One I like is

AU Optronics is the third largest thin film transistor LCD Panel manufacturer in the world. Market share for panels > 10" increased for all three market sectors: Notebook PC, LCD TV, and LCD Monitors. In panels < class="blsp-spelling-error" id="SPELLING_ERROR_0">th for mobile phones, 2nd for Digital Video Cameras, 3rd for Digital Still Cameras, and 2nd for General electronics (video game players, etc).

AUO is currently priced at 1.5x book, 1.56x sales, and 7.6x cash flow. Compared to the industry at 3.67, 3.15, and 18.9. The main factor in being valued less than their industry is their profits have not been optimal. That is what's changing. Currently, as profiled by a number of media outlets, demand for LCD panels is outstripping supply, which is leading to higher sales prices and higher margins.

Their May revenue was a record at 76.4% higher than last May. Year to date revenue (through May) is up 35.8%. This is what is leading them to publicly announce at their annual meeting that they are returning to profitability.

In terms of value, they are obviously undervalued compared to their industry. Once quarterly figures come out showing they indeed are returning to profitability, shares should increase. As revenue, margins, profit, and cash flow increase, I feel they will come closer to parity with their industry, but not become fully valued without a demonstrated consistency of earnings. In a cyclical business that is always the challenge and skepticism will remain the key obstacle in coming to full value.

The current price per ADR share (10 Taiwan shares to 1 ADR), could double without becoming overvalued fundamentally or compared to the industry based on their YTD revenues.

The catalyst is three-fold:
1) Demand for their products is higher than supply, creating higher margins and revenues.
2) YTD revenue growth is 35.8%
3) Higher revenues and margins are returning AUO to profitability

Wednesday, June 20, 2007

The Catalyst Investor

We have found a number of key items that can give a particular stock an increase in market value. As we find these, we will list what stocks we think will experience an increase due to increasing margins or volume, or a decrease in costs.

A list of books will be posted in the future, showing where we have gained the most education. Overall, we are influenced by Jim Rogers, Warren Buffett, Seth Klarman, and Mohnish Pabrai.

More posts will follow