For those that care, AUO book value is 9 billion divided by 787 million shares or about 11.44 per share. This is close of business 2007 and since then they have earned over a buck a share in Q1 and .50 cents is a very conservative guess for Q2 so lets say the company has owners equity of at least 10 Billion and we divide that by 787 million and we get current book value of: $12.70.
I think $12.75 is a fair estimate of current book value and I imagine earnings will be higher than most think and that current book value is $13 or so.
Asset to Liability ratio is at least two to one and goodwill is turning into cash at an astounding rate.
Its funny that we have bashers coming to the board and saying value doesnt matter. Earnings dont matter. Its different this time.
Well tell that to Benjamen Graham, Warren Buffett and John Templeton.
This company qualifies as an extreme value stock for value investors based on any metric you use. Its a classic contrarian value pick play and it comes with earnings growth in a hot technology industry.
I have no disagreement with anything in your post, except: "....The TV that saves $10 a month in energy usage is going to win the battle...." $10/month?? Where the heck do you live?? Did you mean 10 cents per month? Gheez!! Most of my electric bills are under $100/month, and I'm sure that 90% of that is heating/AC. We also do cook and take showers once in a while. We probably watch our share of TV, but I doubt if it eats more that $1 in electricity per month.
"Over the past 18 months AUO has pretty much dominated the 7.5 gen market and others are rushing to catch up. Other people are now "building" 5 gen through 7.5 gen plants while AUO has committed 3.5 Billion to building its next 10-11 gen plant. I think that AUO will have its new plant up and running maybe 12-18 months after the so called new 7.5 gen plants come online. It seems to me that AUO is pretty much ahead of the curve."
Maybe within Taiwan AUO has been ahead of some competitors, but looking at Korea and Japan (Sharp), AUO has been as much as a full year behind.
Samsung starting ramping their 7G fabs as early as the summer of 2005, followed not that long after that by LG Display's 7.5G fab (same as used by AUO). AUO only started ramping their 7.5G in early 2007 I believe. While LG Display delayed next generation investment, Samsung and Sharp have actually ramped their industry leading 8G fabs to full production at this point.
It has to be said however that advanced fab capacity hasn't been a great competitive advantage, as evidenced by AUO earning more than say, LPL, because the high panel prices have allowed very fat margins for AUO's large 6G fabs.
"....When is the last time you saw a stock earn $1.12 for a quarter and it sell for $16....."
You are entirely correct that this stock doesn't trade sensibly, but that's the fault of traders, and is all the more reason to hold it "long term" (though Warren Buffett would laugh at the shortness of my "long" term). I will say that as long as its PEG remains below 1.1 - 1.2, AND it is growing at a reasonable rate (or better), then I can't see any reason to jump out just to jump back in later.
Over the past 18 months AUO has pretty much dominated the 7.5 gen market and others are rushing to catch up. Other people are now "building" 5 gen through 7.5 gen plants while AUO has committed 3.5 Billion to building its next 10-11 gen plant. I think that AUO will have its new plant up and running maybe 12-18 months after the so called new 7.5 gen plants come online. It seems to me that AUO is pretty much ahead of the curve.
With Wal-Mart practically demanding that the products it sells be energy star compliant AUO should have a sharp lead on the competition and a lot of the older technology plants will pretty much fall off the map as they just wont be able to meet the new requirements. AUOs panels are thinner and use less electricity. Other companies make good panels and Samsung might even claim a performance edge but they use boatloads of electricity to do it.
With Wal-Mart forcing energy efficiency in the flat screen market plasma probably is close to being obsolete and might die altogether. Other older gen plants better convert to making LCD picture frames and other low cost and low margin business.
Wal-Marts plans to force energy efficiency down manufacturers throats throws AUO into a 2 year lead in the industry and others will once again have to work hard to start to catch up. Consumer reports talked a lot about energy efficiency in its tv issue and energy efficiency isnt a topic thats going to go away. The TV that saves $10 a month in energy usage is going to win the battle. As little as you think about it over a 10 year lifespan thats probably $1000 and the tier 2 LCD panel makers and all the plasma panel makers are probably going to dry up and disappear.
This is the best discussion this thread has seen. Thanks for the great input guys.
I currently have the book value at 13.32(stolen from my financial site) and if we look at the industry average the price is 1.4-1.8X book. You can do the math on that one. Second the P/E is just ridiculously low especially considering the PEGs being tossed about.
Problems I have with AUO may be getting into the 10G too late. I realize they have to build these right beside the buyers factories but was wondering if any of their existing 5G or below were close enough. I think it would be smarter to get out of the lower generation plants early and switch them up. Thoughts....
bd the word longterm bothers me here. I do think we have a few good months here though.
My problem is that this stock just doesn't play by normal rules. When is the last time you saw a stock earn $1.12 for a quarter and it sell for $16 and have it described as part of the weak half of the year?
If I follow my plan I will be selling at some point in late fall and waiting for the next pullback hopefully from much higher levels..
Lets see if I stick to my plan.
"""For those that care, AUO book value is 9 billion divided by 787 million shares or about 11.44 per share. This is close of business 2007 and since then they have earned over a buck a share in Q1 and .50 cents is a very conservative guess for Q2 so lets say the company has owners equity of at least 10 Billion and we divide that by 787 million and we get current book value of: $12.70."""
How does all that depreciation on equipment that still has its value affect your numbers?
This company takes depreciation in the billions each year on equipment that isn't going away. Imo, book value is grossly understated.
Ok, lets talk about quality of assets. Current assets such as cash and accounts receivable are very liquid and can be used for good things. Hard assets such as equipment and factories is less liquid. Goodwill is an empty asset that has no value except in depreciation. Now lets say that AUO earns $6 per share in 2008 but writes down $2 per share in goodwill and depreciation, Earnings will come in at $4 per share but on the balance sheet $2 per share is deducted from goodwill and equipment value and $2 per share is added to the cash value of the balance sheet in current assets. The good news is the company isnt paying taxes on the $2 added to the cash side of the ledger because it isnt being shown as profit. Its just transitioning hard assets into liquid assets and there is no effect on book value. Long term as assets get depreciated then you cant write them down anymore and rather than having a neutral situation on book value profits start to increase. For instance, for the first time in probably 5 years, AUO has less than $1 billion in goodwill on the books. At the current rate in about 2 years they will no longer be able to write down goodwill anymore because there wont be any left. However there should be a Billion extra in the cash on the books as goodwill turns into cash and at current rates the company will increase earnings $500 million a year because they cant and wont have the write off. Some may think an extra $500 a year is good because it will enhance profits. And others would rather book value turn to cash on the balance sheet untaxed. Some analysts care more about cash flow and EBITDA than they do earnings. EBITDA is earnings before writedowns like interest, taxes, depreciation and amortization. AUO's EBITDA is crazy. In 2007, AUO made about $1.5 billion in net profits but they also had $2.5 billion in depreciation so based on depreciation + profits alone they added about $5 per share of cash to the books. Another $2.5 billion was spend on capex so you have to figure that if AUO quit "growing" and concentrated just on turning profits instead of building new capacity and then writing it down that it would have made about $7.5 Billion or $10 per share last year. 2008 is off to a good start and is improving on 2007 numbers.
Of course this is a growing industry and is attracting new players and investment. As capex slows and depreciation slows then the company will start to lower prices and margins and sell product for a lower price while still maintaining gross margins. The glory days dont last forever.
In the future rather than spending money to buy or build new factories, AUO could have the same material impact on earnings per share if they just started to buy $8 Billion in stock repurchases each year rather than spending it on adding capacity. They could also buy out a competitor. They could hand it out in a dividend and I wouldnt mind a $10 dividend each year. If they dont do anything and keep building cash they way they are then the company becomes a ripe takeover target as at current prices an acquiring company could buy it and then use its own cash to pay for it. Its looking very likely that AUO will end 2008 with $10 Billion of cash on the books, goodwill written down close to zero, a big reduction in debt load and a balance sheet that looks very pretty. Sales last year were close to $15 Billion and Operating Expenses were a smidge over $2 Billion and its easy to see how much money the company is REALLY making.
I do not disagree with your conclusion that AUO is a good buy in terms of BV. But I consider that as "an extra"; more important is that it is very cheap in terms of current profits, margins, and growth rates. It is particularly cheap considering that it is situated well to take advantage of China's consumer graoth.
Im a value player and make no bones about it. Value players arent good at guessing day prices and Im not good at it either. We are probably seeing some window dressing end of the quarter selling where mutual fund managers are getting stock off their books so they dont have to show a decline and hedge fund managers are shorting more to push the prices down to show a gain but seriously Im not good at short term price projections.
I think when earnings come out next month that the stock will start to rise. Until then, people wont notice or care and we will continue the malaise of people focusing in on the negatives of housing, consumer confidence, high oil, coming competition etc... When a stock goes down the bears come out in force and roar.
Anyway, mid term from now until say the end of 2009 I think the company will do well based on improving earnings, cash flow, and book value each quarter. Im not sure what well is because if the market would value this company at a 10X PE then wed be in the $40s. But even if it holds $5 of earnings in 2009 a PE of 5 would be $25 and thats a nice return for a stock selling below $16.
If however, the price doesnt improve then other scenarios will develop. Everyone in this industry is becoming flush full of cash and rather than buying or building new plants companies will start looking to acquire companies selling on the cheap. Why spend $6 billion to build 3 new Panel Factories when $12 Billion will buy you AUO with $6 billion of cash on the books?
In the oil industry its currently cheaper to buy a competitor than it is to develop new reserves of oil and so oil companies are getting bigger and bigger rather than spending big bucks to do new drilling.
Long term I see consolodation and shakeout as it becomes more and more obvious that the market does not like and will not reward capacity expansion. Its just going to be cheaper to see companies being bought out at 5X earnings rather than major outlays of new capacity coming on line. This is typical when an industry has declined to the point where value players like me step in and take notice.
Of the $10 billion in stockholder equity that exists in AUO approximately $8 Billion of it lives in what is defined as current assets. So anybody really could buy AUO and then use its own assets to pay for the thing and get a great company on the cheap. Of course buyouts usually get associated with premiums and Id estimate the current buyout price at $25. If and when these companies start to consolidate you will see the industry gain some respect and typical valuations of PE 10 or even higher start to reappear. Right now there is fear of capacity expansion growth faster than demand growth and its depressing the prices but that cant and wont continue forever. Weak players will exit the fields and new capacity will start to cost more than buying out competitors.
By any metric, long term this is a great industry and value should get rewarded.
AUO is a value stock indeed, I still hold 2000 shares of it, but I would not average down this stock yet. Thinking about this: if Nasdaq drop another 10-20%, and following with the worldwide markets crush, where AUO will go?
If any of the element appears, Nasdaq will fall more than 10% in the coming months:
1). oil price higher than $150 per barrel,
2). July.30th GDP number is negetive and showing USA is entry recession.
3). Isrel attack Iran.
4). inflation problem deepen in the coming months.
5). more bad news come from housing price crush, and financial sector(LEH will bankrupcy? then GM?)
I would not sell AUO, but add more when I see the real bottom. Trade tech stocks you need not only take care of stock's fundermantal situation, but also relating with the Nasdaq moving direction.
OK. So where will AUO's price be in 1 week, 1 month, 3 months, 6 months. Please be as specific as you can. Would there be better "value" plays elsewhere in the meantime?
Do you think AUO is a well kept secret? After being on Cramer, Fox Bulls & Bears?
Not a basher, sorry. Realist.
Thank You for you specific reply.