The current earnings season that is now winding down has been a volatile one for sure, and within that volatility are opportunities ripe for the picking. One company I like right now, AU Optronics Corp (ADR) (NYSE:AUO), saw its shares weaken disproportionately after reporting slightly softer-than-expected fourth-quarter earnings at the end of January, and the overdone reaction creates an interesting trade possibility.
Taiwan-based AU Optronics is one of the world’s largest manufacturers of flat panel displays for end markets ranging from recent-model cars to smart phones. The stock is down about 11% off its recent peaks, which is a little out of line for a 4% earnings miss and a warning that first-quarter sales will be a little softer on a sequential basis. The stock is currently trading around what looks to be support in the $5.28 area – the last time AU Optronics even came close to testing that support line, shares rallied 30% over the following month.
The technical lines are not rallying at the moment, but are certainly in a place where they could turn very quickly to favor the bulls. I’m intrigued with how the relative strength index (RSI) is about where it was when AU Optronics started that 30% bounce back in January. And while there’s no guarantee that we’ll see that exact kind of move again, the upside potential here is too great to ignore.
As I mentioned, reaction to the fourth-quarter numbers was truly overstated. Analysts immediately rolled the earnings shortfall into their 2015 models, making AU Optronics look like a stronger growth play than ever. On the other hand, revenue targets for the current quarter may now be too low.
We have fairly firm guidance that shipments are trending down 6%-10% from last quarter’s levels. This might initially seem dire, but panel sales are usually soft at this time of year. Some quick math shows that AUO may be lined up to report revenue of $3.07-$3.21 billion in three months – a little above the low end of consensus and well above year-over-year levels on the strong end.
The analysts are all over the map on how fast AU Optronics can grow its business this year. Consensus on the revenue ramp is fairly confident in predicting roughly 2% lighter sales over the next 12 months as the product mix shifts. We know that’s coming. Additional capacity may help get sales back on the right track.
When it comes to the bottom line, a huge gap between forecasts has emerged for us to exploit. Quarterly EPS targets have come up quite a bit since the company reported an upside fourth-quarter surprise on Jan. 29, but adding them together still leaves the full-year EPS consensus about 33% too light.
The full-year number is going to have to come up in the next few months to make the math work out. When that happens, traders who used that artificially low target in their forward P/E calculations will need to buy into AU Optronics fast or else admit that the stock was a hidden bargain all along.
Based on the quarterly numbers, AUO is growing its earnings at a healthy 38% annualized rate, with the strongest comps coming in the upcoming first- and second-quarter releases. If the company hits its marks, we will be able to capture the sweet spot of that growth cycle before we need to cut bait.
AUO is trading at a cheap 6.5X forward earnings and an effective growth-adjusted PEG ratio well below 1X, marking it as a highly attractive prospect. A little over a year ago, when this company was just returning to profitability, the forward P/E was more like 24X earnings, so it’s clear that multiples are currently on the depressed side.
What ultimately draws me to AU Optronics is the fact that it is trading below liquidation value. Tangible assets are worth $5.70 per share, of which $2.45 is in cash. You can effectively get the inventory, the production lines and the raw components at a discount and the significant operating cash flow comes along with it for free.
Electronic screens are not exactly going away any time soon, and as devices break, wear out or simply get replaced by newer models, AUO has a huge market to play in. Every new car needs at least one display on the dashboard. New approaches to television design require panels that only a giant like AUO can provide.
There is significant growth and potential here to capture, which is why I believe this is an interesting opportunity at current prices under $5.55.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network, and other media.
