AUO: AU Optronics Should Display Strong Returns
My latest column is up at RealMoney.
In a normal economy, shares of Au Optronics (AUO) would be rising as fast as the company’s sales. Instead, sales and cash flow are zooming, and the company has been topping estimates by a wide margin, but shares keep moving sideways and now trade for less than 5 times projected EPS. In time, look for shares to catch up with the growth metrics.
AU Optronics makes thin film transistor liquid crystal display (TFT-LCD) panels and other flat-panel displays, which are used in notebook computers and desktop monitors, as well as in portable consumer electronics devices and LCD televisions. AUO competes primarily with LG Display (LPL) and Samsung Electronics, both of which are larger than AU. Corning (GLW - Annual Report) is also a significant force and is one of the company’s primary suppliers for glass substrates.
The company generated $4.8 billion in cash flow from operating activities in 2007 and used just $2 billion for capital expenditures. The resulting $2.8 billion in free cash flow represents a 17.7% free cash flow yield based on the current $15.84 billion enterprise value. Even if the free cash is cut in half (capital expenditures are expected to be twice as high this year) the yield would be more than double the current yield on five-year Treasury bills. That’s a pretty healthy premium for a company expected to grow 30% annually over the next three to five years.
Finally, AU Optronics is also trading at a mere 1.32 times book value, below the industry average of 1.62 times. Even if the company only grows in line with its 14% return on equity, an expansion to the industry average valuation could provide 20% annual total returns over the next five years.
Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.
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