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LCDs: A ChangeWave Tsunami
05/28/2004 12:00 am EST
While it's difficult at best to offer investors a list of stocks that could potentially double, a 79% portfolio gain last year suggests that Tobin Smith is up to the task. Here are his favorites in the digital TV arena, which he feel just might double in the next 12 to 18 months.
"We want to be owning stocks that have good news now, but will have even better news in 2005. That’s the idea. As we have an economy that starting to peak in terms of earnings growth, we need to make sure we are owning stocks in companies that are still at the beginning of their cycles and will still be accelerating even as the economy is slowing. The number one trend we are playing today is flat panels and digital electronics. Here are three stocks poised to benefit from this 'ChangeWave':
"The excitement in the LCD TV space–and all high-def TVs, for that matter–is reaching a frenzy as the Athens Summer Olympics is starting to get buyers into the showrooms at ever-greater rates. By the time the Olympics are over, more than one billion people will have seen part of the event at some time on a high-def flat screen. My prediction is this Christmas will be the inflection point for high-def TV. But it will be Christmas in 2006 and 2007 when LCDs will take over from the DLP and plasma screens, which is why we want to own our LCD TV component stocks now. A study released earlier this spring by research firm IDC predicts that the market for high-def TV LCDs will grow at more than 50% a year for the next few years.
'This demand continues to make our component plays the way to ride this tsunami ChangeWave. AU Optronics (AUO NYSE) and Silicon Image (SIMG NASDAQ), continue to be outstanding values and priced 100%-200% lower than we model their value to be if you discount their future cash flows (growing at three to five times the overall LCD growth rate) to today.
"AU Optronics is the third largest manufacturer of flat panels. These panels can be used in your portfolio computer, your handheld, etc. But the key to this wave is the amount of televisions that will begin to roll off the assembly line in late 2004 and 2005 as we see larger LCD screens. The stock got up to $28 and then sold off. It’s now a great buy. One of the reasons it has sold off is that the Taiwan government decided to sell of its shares into the public market. Why? They had a lot of profit. At the 21-22 level, you are paying just seven times 2004 earnings–for a company on a secular growth rate of about 35% to 40%.
"Now when you go out and buy that big, high-def TV set, you are going to want a DVD player that goes with it. A digital video interface (DVI) goes from the DVD player to the TV screen. Now, if you don’t have a DVI interface, the digital image and digital sound will be converted to analog signals. This reduces the quality of the picture and sound. What you want is digital to digital, and that’s what DVI does. To benefit from this trend, you want to own Silicon Image, which owns the intellectual property behind the high-definition digital interface. When we first started looking at this company, they had about 25 licensees. Now, they have about 90. We expect them to have 170 consumer electronics firms license their DVI interface chip. Buy owning this stock, you own the technological gateway from one media to another. They are going to double their growth every year for the next four to five years, as more and more digital products have DVI interface chips."
"We also suggest that investors look at another play on this trend– California Micro Devices (CAMD NASDAQ), which is an indirect way to invest in Samsung, which is the second largest flat-screen builder and the number two chipmaker. Samsung, however, only trades in the US as an illiquid ADR. So we look down the food chain to find suppliers that Samsung is buying from and owners of intellectual property that Samsung can’t recreate. The answer is California Micro Devices. The firm makes the connectors that are required for LCD screens. The company does the same thing in the cell phone world. We are finally getting to the point where the third generation phones–with higher speed and wireless data–are now here. In addition, everybody’s phone now has a camera on it. Samsung, which is now the fourth largest cell phone maker. California Micro's number one customer is Samsung. CAMD is trading around $13-$14. The company is growing 35% to 40%. The chart is fantastic and the stock should be worth $25 to $28 over the next 12 to 18 months."
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