LCD TVs: Stocks to "Watch"

01/23/2004 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

"The LCD TV wave is one of the hottest trends around," says Toby Smith, editor of one of the hottest newsletters around-- ChangeWave Investing.His first play on this trend (featured in our 2004 Top Picks report) was ChipMOS. Now, he adds some other favorites.

"Silicon Precision (SPIL NASDAQ) is a very cheap play on the integrated chip testing biz, which is involved in LCD TV. In fact, it’s ridiculously cheap. The stock should be valued at $12-$13 versus their competitors. The company just reported record revenues for December 2003, its best month ever as a business. SPIL is Taiwan's second largest semiconductor packaging and testing firm, and with revenue up 23% for the year to a new record high, the growth wave is clearly ramping. Siliconware Precision works for most of our favorite digital media chip companies. This stock is cheap and I assume this mispricing will not last for long. We’ll buy the stock under $6.50 with a $12 target.

"Silicon Image (SIMGE NASDAQ) owns the intellectual property behind the two biggest things to hit the digital home network. Digital Visual Interface or DVI, allows you to send fully digital content from a DVD, cable box or any digital content source to a LCD or plasma screen. This is a big deal. Most last generation monitors can’t take a digital signal; they take analog signals and convert them to digital. The difference is amazing when you see a digital-to-digital picture on an LCD or DLP monitor. SIMGE licenses DVI technology to every major company and is paid a royalty on those sales. They also license HDMI, which brings all-digital video and audio channels to your home theater system. Silicon Image has won a patent infringement suit, which had been keeping the stock down and giving us a great opportunity to get in on this stock. Buy up to $11 for a target of $20.

"AU Optronics (AUO NYSE) is a pure-play LCD panel manufacturer. In September of 2001, AU Optronics was formed with the merger of Acer Display and Unipac. This pairing has worked out well, forming one of only a few producers able to provide small- and large-sized display panels. AUO generated over $2 billion in sales revenue in 2002 and saw that explode to almost $4 billion in 2003. AUO will have a 60-inch high-def LCD flat panel by the end of 2005 and then 71-inch and 80-inch diagonal screens by the end of 2008. These will be the state-of-the art in flat panel displays. What’s most impressive on the investment analysis side is the undervaluation of AUO, which I think is because it is not widely followed on the street. My model has them growing earnings from 23 cents a share over the last 12 months to $1.20 in 2004 and $1.80-$2 in 2005 as the LCD wave starts to accelerate even faster. This means we are paying only eight times next year's earnings for the stock. This makes AUO one of the biggest bargains in techland. We even get a 1.1% dividend. What’s not to like here? I am adding AUO to our growth list with a buy under of $15 and a target of $24-$25."

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