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TheStreet Open House

Diodes a Strong Buy, With Ultra-Low P/E Growth Ratio, Takeover Potential

NEW YORK (TheStreet) -- It would be an understatement to say it is odd to see a semiconductor stock with less than a 65% long-term price-to-earnings-growth ratio at this point in the stock market. This is especially true given that the chip stocks have been one of the leading sectors in this year's rally.

Diodes  (DIOD) is still priced around $30, even though earnings are projected to jump from $1.05 last year to $1.51 this year and then $1.96 in 2015. (Wednesday, the shares closed at $29.48, up 0.8% for the day.) Even at a discounted earnings per share rate of 26.5 times this year's number, that would yield a price of $40, not the sub-$30 level where it has recently been.

You might not find the following piece under the company's symbol, but Nomura Securities analyst Rojit Shaw recently told Barron's that Diodes is one of only three takeover candidates he considers fundamentally undervalued. He might even get around to formally following the stock before it spikes much higher.

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Why he apparently hasn't yet done so is a bit of a mystery. Still, ours is not to wonder why, but rather to ascertain whether and when to sell and buy. For Diodes, the time to buy is well nigh.

Technically speaking, the stock's chart pattern also looks superior. Diodes moved up to modest new highs a few weeks ago, then retreated from north of $30 and spent its time constructing the first 75% of an increasingly symmetrical V-shaped base. It has also formed a nearly perfect uptrend channel over the past seven months, as TheStreet's Jonas Elmerraji noted in 5 Tech Stocks to Trade for Gains This Week, yet is up less than 10% from where it traded one year ago.

Diodes may now be poised to break out to a new high. At that point it may well end up back on the Investor's Business Daily Stock Spotlight page, just as it was a few weeks ago. From there, it would remain an IBD-flagged buy until it moves another 5% higher. It might even be noted by IBD, once again, that "Diodes' profit growth has ranged from 44% to 136% compared to year-earlier levels over the past six quarters."

Although based in Plano, Texas, Diodes apparently takes a bit of heat for the fact that the primary customers for its specialty chips are in Asia, and especially China. Then again, those countries happen to be where many of communications, automotive, computing, consumer electronics and industrial products that use its chips are getting built these days. There has also been some insider selling, but the majority of that has been from just one company director.

Perhaps some investors think there just isn't anything sexy enough about the company's diverse lineup of complex diodes, amplifiers, transistors and power-management devices such as voltage regulators, AC-DC converters, LED drivers and controllers. Then again, anyone who isn't a Luddite should find it very exciting that the company has a tremendous history of announcing ever-greater advances in the power efficiencies and performance specs of much of its product line.

As if the above factors were not enough to make Diodes a strong buy, it also sports a 4.3 to 1 current ratio and it has more cash on hand than it has debt. Whether or not this specialty chip maker soon catches a takeover bid, it seems highly unlikely that it will trade at a depressed level for much longer. In fact, a series of fresh new highs may be only days away.

At the time of publication the author was long DIOD.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. TheStreet Ratings team rates DIODES INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate DIODES INC (DIOD) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.9%. Since the same quarter one year prior, revenues rose by 18.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • DIOD's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 2.75, which clearly demonstrates the ability to cover short-term cash needs.
  • DIODES INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, DIODES INC increased its bottom line by earning $0.55 versus $0.51 in the prior year. This year, the market expects an improvement in earnings ($1.54 versus $0.55).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 629.7% when compared to the same quarter one year prior, rising from -$1.93 million to $10.20 million.
  • Net operating cash flow has increased to $46.12 million or 47.21% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 2.94%.

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