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.

CNBC Stock Blog: Jason Votruba likes small-cap energy. What Web Extra stock(s) did he recommend to CNBC.com?

Web Extras for CNBC.com Readers:

Votruba also likes Woodward Governor (WGOV) and Unit Corporation (UNT).

In the models I follow, Woodward Governor does pretty well.  It scores among the best for earnings momentum, earnings quality and price momentum. However, its return potential is among the worst.

Unit has a similar profile, though the breakdown differs. It merits high rankings for earnings momentum, price momentum and return potential but poorly for free cash flow.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

TTM Technologies (TTMI) manufactures printed circuit boards for the high-end commercial and aerospace/defense markets. The company focuses on a “quick-turn” model that can provide custom-fabricated PCBs to customers within as little as 24 hours. This strategy allows TTM to charge a premium for quick-turn services (which account for 15% of total revenue) and insulates TTM from the extreme cyclicality faced by most electronics manufacturing services (EMS) providers. In the last 10 years, the company reported just one year of net losses (2002).

TTM’s largest original equipment manufacturer customers in 2007 were Cisco (CSCO) , Honeywell (HON) , Juniper Networks (JNPR) , Northrop Grumman (NOC - Annual Report) and Raytheon (RTN) ; these OEMs accounted for a combined 24% of total sales. More than half of total sales were to EMS providers including my favorite, Celestica (CLS - Annual Report) , as well as Flextronics (FLEX) , Jabil (JBL) and Plexus (PLXS) . The diversity of customers and end markets should shield the company from short-term market share fluctuations among customers.

Here’s how the company fares in the Stock Market Beat models:

• Earnings momentum - positive
• Earnings quality - positive
• Price momentum - positive
• Free cash flow - positive
• Return potential - neutral

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

New orders for long-lasting U.S.-made manufactured goods fell by 5.3 percent in January, the biggest drop in five months and more than analysts expected, and a key gauge of business spending also declined, a Commerce Department report showed on Wednesday.

But the news wasn’t all bad. Some industries look like a recovery may be beginning.

Consider computers and electronic products.

Or semiconductors.

Or machinery.

These changes are all based on non-seasonally adjusted data from the U.S. Census Bureau.

The following is a reprint of my January 9, 2008 RealMoney column.

Looking through my screens recently, I came across Thomas & Betts, Inc. (TNB). Earnings have been consistently revised upward, to the point that its Zacks rank (a measure of earnings estimate revision) jumped from average to the best last week. The latest revision trend puts it among the top 5% of stocks in terms of earnings revision.

All the good news, however, has been falling on deaf ears. The stock is down nearly 30% from its July 2007 peak. As a result, it is now trading at 12x estimated 2008 earnings per share, and offering a free cash flow yield of 7.8% based on trailing 12-months free cash flow.

Sensitive to the Economy?

It isn’t hard to figure out why the stock is down. The company operates in three segments: electrical, steel structures, and HVAC (Heating, Ventilation and Air Conditioning) but more than 80% of total revenues comes from electrical.

According to the company’s 10K, “demand for electrical products follows general economic conditions and is sensitive to activity in construction markets, industrial production levels and spending by utilities for replacements, expansions and efficiency improvements.” I’m not too worried about spending by utilities, but those first two revenue drivers certainly give one pause.

Starting with activity in construction markets, we all know that housing starts have cratered.

Source: www.Data360.org, U.S. Department of Commerce, Census Bureau

Turning to industrial production, well, it ain’t looking so hot either.

Source: St. Louis Federal Reserve, William A. Trent

So if Thomas & Betts’ business is sensitive to construction activity and housing starts, one might infer that sales have taken a similar turn. But one would be wrong.

Sales for the electrical segment rose more than 12% in the first nine months of 2007, ahead of the overall company average. In the third quarter, the gain was 18.5%, though this was driven in large part by the acquisition of the Joslyn Hi-Voltage and Power Solutions businesses from Danaher Corporation in July 2007. On a pro-forma basis, growth assuming continuous ownership of Joslyn would have been 10% for the third quarter and 7% for the first nine months.

Instead of falling off a cliff, growth accelerated in the third quarter even after adjusting for the acquisition. So far, it is hardly looking like the company is “sensitive to activity in construction markets and industrial production levels.”

More to Come

Apparently, management is finding lots of attractive acquisition opportunities out there. It increased its credit facility to $750 million in October and in November closed on the $450 million acquisition of Lamson & Sessions Co. Between 2004 and 2006, the company made cash acquisitions totaling just $50 million, so the 2007 activity marks a significant change.

It is possible that the sudden surge in acquisition activity is at least part of the reason for the decline in share price. The management team has been in place for several years but is relatively inexperienced at integrating acquired operations. Investors may be concerned that a bad acquisition will lead to operational problems and write-offs.

That may be true. But another explanation is that management saw an opportunity arise when the private equity market dried up in July and is using that opportunity to bulk up their business more cheaply than they would have been able to a short time ago.

At any rate, the decline in share price appears to have anticipated at least one of the two concerns. I think from current levels it would probably require both a decline in business fundamentals and a botched acquisition to justify further share declines. And if neither occurs, things could look sweet indeed.

Based on trailing earnings, TNB has traded at an average multiple of 25. The current 15x trailing multiple is its lowest in five years. If the company can earn the expected $4.03 in 2008 and maintain its current (5-year low) valuation multiple, it could reach $61 by year-end. At its average multiple, the $4.03 in earnings would be worth more than $100.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

The following is a reprint of my January 8, 2008 RealMoney column.

In other articles, I have outlined the reasons why I think the semiconductor industry is poised for strong stock performance and why I think MEMC Electronic Materials (MEMC) is the best play on the sector.

But I also realize that a bullish semiconductor outlook right now involves making a grab at that falling knife. Therefore, I thought I should also let people know which semiconductor stock looks most vulnerable to a downturn.

I think that stock is Microsemi (MSCC).

Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high-reliability semiconductors. Its products manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.

Microsemi has held up fairly well, handily beating the performance of the Semiconductor HOLDRs (SMH) over the last year. This may be due largely to its strong end markets, which include defense, commercial aerospace, industrial/semicap, medical, mobile connectivity and notebooks, monitors and LCD televisions.

More Questions Than Answers

To me, however, the strong end markets only raise questions concerning Microsemi’s fundamental performance. For example, with such strong end markets, why did its cash from operations fall by more than half in the year ended September 30, 2007, compared with the prior year? Why is its inventory rising faster than sales, and why is its gross margin slipping?

I turned to the company’s latest 10K in hope of finding answers.

To begin with, the area is highly competitive. According to the 10K (emphasis added), “some of our current major competitors are Freescale Semiconductor, Inc., National Semiconductor Corp. (NSM), Texas Instruments, Inc. (TXN - Annual Report), Koninklijke Philips Electronics (PHG), ON Semiconductor Corp. (ONNN), Fairchild Semiconductor International, Inc. (FCS), Micrel Incorporated (MCRL), International Rectifier Corp. (IRF), Semtech Corp. (SMTC), Linear Technology Corp. (LLTC), Maxim Integrated Products, Inc. (MXIM), Skyworks Solutions, Inc. (SWKS), Diodes, Inc. (DIOD - Annual Report), Vishay Intertechnology, Inc. (VSH), O2Micro International, Ltd. (OIIM) and Monolithic Power Systems, Inc. (MPWR).” Gosh, I wouldn’t want them to leave anyone out.

Yet competition is just the third risk factor among a list that runs more than 12 pages.

The company notes the decline in net income related to non-cash acquisition related charges, restructuring charges and other factors. Yet non-cash charges don’t quite explain the decline in cash flow from operating activity. Furthermore, with “non-recurring” charges being reported in each of the last three years I’m going to go out on a limb and say investors can probably expect more of them in the future.

A Questionable Acquisition

According to the 10K, the company completed a merger with PowerDsine on January 9, 2007 and subsequently renamed PowerDsine Ltd., Microsemi Corp. - Analog Mixed Signal Group, Ltd. (”AMSGL”). Later, it notes that it “provided a valuation allowance of approximately $9,534,000 as of September 30, 2007 on all of our net deferred tax assets related to AMSGL as we have determined that it was more likely than not that the deferred tax assets would not be realized.”

Deferred tax assets are realized when the company earns taxable income in future periods. I’m not a big fan of acquiring companies that will “more likely than not” fail to earn taxable income in the future. This was one of the contributors to the decline in cash flow.

Microsemi’s gross margin weakened in the latest quarter (see chart.)

Source: Zacks Research Wizard, compiled by William A. Trent

I think there is additional margin risk stemming from burgeoning inventory levels.

Source: Zacks Research Wizard, compiled by William A. Trent

Since a large percentage of costs at semiconductor companies is fixed, producing more units results in a lower cost per unit and higher profit margins. But many of the additional units Microsemi is producing are going into inventory rather than the hands of customers.

At some point, Microsemi is going to have to sell that inventory (by producing less than customers demand.) That will reverse the positive effect on future gross margins.

Valuation Too High

All this would matter less if the stock looked cheap. But on the basis of free cash flow yield, which is my favored metric, Microsemi looks more expensive than most of its peers.

Free cash flow in 2007 was less than $4 million. On an enterprise value of $1.56 billion, that amounts to a free cash flow yield of just 0.25%. The cash flow would have to grow 150-fold just to bring the yield on par with that of Treasury bonds.

Even using the company’s best cash flow on record ($36.5 million in 2006) the yield is just 2.35% - nearly a percentage point below that of Treasuries. If I thought the company could return to the 2006 cash flow level, then grow at the forecast rate, I would be willing to consider an investment.

But given the rising inventory, unprofitable acquisition and potential for further declines in gross margin, I won’t be holding my breath.

Disclosures: William Trent is long Semiconductor HOLDRS (SMH) and Maxim Integrated Products (MXIM). He holds put options against shares of Lam Research (LRCX).

Note: If you want to find great mutual funds
make sure to check smartmoney.com.

William Trent currently owns put options against the shares of Lam Research (LRCX).

I was pretty bearish on the LCD market last year, but as the overcapacity problem started to subside I have been fairly silent of late. Given the positive article about Corning (GLW - Annual Report) in this week’s Barron’s, I thought it a timely opportunity to look back at the recent LCD supply chain conference calls to see if there are any significant trends. I’ll start with the subject of the Barron’s article.

Starting with display, sales were $610 million in the second quarter, a 16% increase compared to the first quarter sales of $524 million. Glass demand was stronger than we anticipated. Glass volume increased 20% sequentially in the second quarter versus our guidance of 8% to 12%.

(Excerpt from full GLW conference call transcript)

That sounds pretty supportive of bullishness. However, the company was quick to throw a little cold water on the situation.

We believe this was mostly supply chain driven and not resulting from a change in end market demand, although we don’t have final end market statistics yet, and we have seen some reports of stronger IT demand.

We believe the supply chain’s approach to meeting the impact of television seasonality on the overall LCD industry is continuing to evolve. Clearly the panel makers’ decisions to run at lower utilizations in the first quarter and maintain smaller amounts of panel inventory was a refreshing change from last year. Our customer checks in May and June indicate the aggregate panel inventory is currently within acceptable levels. Further evidence of this can be found in the panel makers’ decisions to maintain, or actually slightly raise, panel prices in the second quarter.

We have a hypothesis that the supply chain has built some inventory at the set assembly level. As we have stated in the past, the set assembly level is the more opaque portion of the supply chain to us.

(Excerpt from full GLW conference call transcript)

In other words, consumers aren’t buying more TV sets than expected - but TV makers are buying more components just in case. As we saw last year, if they are wrong the excess inventory will hurt pricing and at any rate Corning’s long-term sales can only be in line with the end market. If they sold extra this quarter they will sell less in some future quarter.

LG Philips (LPL) saw a similar trend, but doesn’t seem concerned.

Ron H. Wirahadiraksa

We feel that the inventory levels throughout the channel are still quite healthy. There’s been some increase but please bear in mind that previously, the previous quarter and also the beginning of this quarter, inventory levels were quite low. We think that by and large, TV inventories is around two months, which is very normal for this time in the season.

(Excerpt from full LPL conference call transcript)

Neither does AU Optronics (AUO).

Dr. Hui Hsiung

This is Hui Hsiung. I think, in general, other than notebook panels, I think both TV and monitor panels, the OEM in the channels are higher inventory compared to Q1, of course. However, in general, those are not very high numbers, at most two weeks is about normal, mostly around one to two weeks is about normal. So it’s a very manageable inventory level.

Earlier, maybe a month ago, there appeared to be higher inventory in the TV 40 plus inch range, but recently, the sale through is improving, so that is getting better as well. So, by and large, I think that building up inventory is what is intentioned during the Q2 period. For a simple reason, I think Q3 we still have a high single digit percentage in terms of shortage between supply and demand. So that bit of inventory will easily be digested during Q3.

(Excerpt from full AUO conference call transcript)

At this point, the capital investments have subsided enough that quarterly inventory fluctuations shouldn’t be too much of a concern. Obviously if the market disruptions continue and, more importantly, begin to affect consumer spending then obviously demand could fall off temporarily. But most down cycles aren’t caused by demand but by supply. And on that basis, I’m inclined to agree with the managment teams that right now the channel inventory build shouldn’t be a big concern.

Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Hexcel Corporation (HXL) reported results for the second quarter of 2007. Net sales from continuing operations in the quarter were $289.8 million, 5.8% higher than the $274.0 million reported for the second quarter of 2006 but below the consensus estimate of $296 million. Net income from continuing operations for the second quarter of 2007 was $17.5 million, or $0.18 per diluted share, slightly ahead of consensus. Net loss from discontinued operations was $8.7 million, or $0.09 per diluted share including an after-tax charge of $9.7 million for previously disclosed legal matters. According to the company:

The second quarter saw a continuation of the first quarter sales pattern for the commercial aerospace market. Because of the A380 delay, Airbus sales were again down significantly from a year ago, but strong demand from all other major customers resulted in the almost 9% overall growth in our commercial aerospace sales. Start-up, training and qualification efforts combined with some unplanned maintenance outages put some pressure on our margins but we still met our guidance targets and expect better year-on-year margin expansion for the remainder of 2007.

The ramp up of new B787 and A380 programs layered on top of increasing aircraft build rates should provide opportunity for good volume leverage next year. Longer term we are encouraged by the continued strength in wind turbine and aircraft orders, especially the new composite intensive A350 XWB.

I’ve commented at length about the A380 problems  and I’ve also noted the extraordinary pricing power enjoyed by turbine makers. If the company could start hitting on all cylinders it might be a strong performer. As it is, the company raised sales guidance to the high end of prior levels.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.