AU Optronics a Play on Sleek, Thin TVs

"What happened to the old bank? It was beautiful."
"People kept robbing it."
"Small price to pay for beauty."
-- Butch Cassidy and the Sundance Kid

LCD sales are booming. People love the beautifully skinny screens that go on their desktops. Moreover, they really love those stylish LCD televisions. And with the high-definition movement helping to catalyze an upgrade cycle in the television business -- which hasn't been a growth business for years, given its nearly full penetration rate in the U.S. -- there's suddenly a new growth business in the consumer electronic industry.

I've owned Corning (GLW - commentary - Cramer's Take), one of the biggest beneficiaries of the LCD boom, for years, and I continue to hold a core position in it. And this week, I began building a position in AU Optronics (AUO - commentary - Cramer's Take), an even purer play on the LCD boom.

Despite the strong growth in demand for LCD technologies, the companies that supply into that line of business trade far below their growth rate. In my newsletter The Telecom Connection on Wednesday, I mentioned that Corning trades at 17 times its probable earnings power next year of up to $1 per share. Wall Street expects the company to increase earnings 62% this year (off a very low base, so take that with a chunk of salt), but more realistically, it's likely to experience 25% earnings growth next year, making a 17 forward P/E (not to mention the 22 P/E on this year's estimates) seem rather inexpensive.

AU Optronics is even cheaper, partly because of the discount the market gives it for being in Taiwan rather than the U.S. Regardless of locale, the stock is trading at only about 10 times next year's estimates, which analysts expect to be nearly triple 2005's earnings of roughly 57 cents per share. The company has run into some inventory glut issues this year (more about that below), which makes the year-over-year earnings growth rate somewhat misleading. Looking at top-line growth provides a more realistic rate of growth for the company of about 40%.

---

At time of publication, the firm in which Willard is a partner was net long Corning, AU Optronics and Microtune, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.