This column was originally published on RealMoney on June 28 at 2:26 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Real estate developers and liquid crystal display (LCD) makers have something in common -- they both tend toward periods of overbuilding.
There's currently a glut of LCD-panel inventory due to all the factories that have been built during the past five or six years, and that's affecting today's performance of
, which recently announced it is cutting back production (though not to a great degree). This helps explain why its stock price has fallen roughly 25% since early May.
Should you stay away from this company? Not according to a couple of guru strategies I use. According to those strategies, this drop in share price could be seen as a buying opportunity.
If you've never heard of AU Optronics, that's not surprising, since this Taiwanese firm makes LCDs for manufacturers that use them to produce computer displays and flat-panel televisions. AU Optronics is not a minor player in the electronics world, however. It is the third-largest maker of LCDs by revenue behind its two South Korean competitors --
-- and its market share will only increase when it completes its planned acquisition of Taiwan-based
later this year.
Here's how AU Optronics holds up under the glare of two guru strategies:
The John Neff Strategy
The Neff strategy looks for a price-to-earnings (P/E) ratio that's 40% to 60% below the market's, which is currently 21. AU Optronics passes this test with a P/E of 10.38. Historical earnings growth should be between 12% and 20%. For AU Optronics, it's been 19.2%, based on the average of the three- and five-year historical earnings-per-share (EPS) growth rates. Not only that, but the analyst community projects 20% growth for the long term, which is perfectly acceptable.
The strategy seeks growth in earnings to be underscored by a corresponding growth in sales. That's true for AU Optronics, which has had a 56.4% sales growth rate, based on the average of the three- and five-year historical sales growth rates.
The last major criterion considered by this strategy is that total return (EPS growth plus yield) divided by the P/E ratio be at least double that of the market or of its industry. AU Optronics' total return-to-P/E ratio of 1.85, based on the average of the three- and five-year historical EPS growth rates, is more than double the market's 0.70.
The Peter Lynch Strategy
AU Optronics also gets passing marks from the strategy I base on Peter Lynch's writings. The Lynch strategy appreciates that management is doing a good job managing inventory; the company's inventory-to-sales ratio was 9.45% last year and is 8.82% this year.
In addition, its yield-adjusted P/E/G ratio of 0.54, based on the average of the three- and five-year historical EPS growth rates, is acceptable (this has to be 1.0 or less). One weakness is that the company's debt/equity ratio, 60.1%, is somewhat high, but its other ratios are good enough to compensate.
AU Optronics is a major player in a booming industry that is struggling with too much production capacity, which leads to too much inventory and, therefore, falling prices. But its stock has taken a hit, and the company is positioned to become a larger presence in its industry. Now is a good time to consider lighting up your portfolio with a purchase of AU Optronics.
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At the time of publication, Reese had no positions in stocks mentioned, although holdings can change at any time.
John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book,
The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback.
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