Undervalued AU Optronics FCF/EV Yield 17%, ROE 18% – All Investable Stock Screener

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One of the cheapest stocks in our All Investable Stock Screener is AU Optronics Corp (ADR) (NYSE:AUO).

AU Optronics Corp. (AU Optronics) is a thin-film-transistor liquid-crystal display (TFT-LCD) panel provider. The company operates in two business segments: display business and solar business. Through its display business segment, the company designs, develops, manufactures, assembles and markets flat panel displays and most of its products are TFT-LCD panels. Its panels are primarily used in televisions, monitors, mobile personal computers (PCs), mobile devices and commercial and other applications (such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals and pachinko machines). Through its solar business segment, the company is capable of manufacturing upstream and midstream products, such as ingots, solar wafers and solar cells. Through the company’s subsidiaries AUO Crystal Corp. and M.Setek Co., Ltd. (M.Setek), it mainly focuses on research, production and sales of solar materials, such as ingots and solar wafers.

A quick look at AU Optronics’ share price history over the past twelve months shows that the price is down 4%, but here’s why the company is undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that AU Optronics has $3.414 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $3.492 Billion in long-term debt and $629 Million in short-term debt. Therefore, AU Optronics has a net debt position of $707 Million (debt minus cash). For investors concerned about the net debt position it’s important to consider the company’s free cash flow position below.

If we consider that AU Optronics currently has a market cap of $3.734 Billion, when we add the net debt totaling $707 Million and minority interests of $553 Million that equates to an Enterprise Value of $4.994 Billion.

If we move over to the company’s latest income statements we can see that AU Optronics has $1.315 Billion in trailing twelve month operating earnings* which means that the company is currently trading on an Acquirer’s Multiple of 3.79, or 3.79 times operating earnings*. That places AU Optronics squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

If we take a look at the company’s latest cash flow statements we can see that AU Optronics generated trailing twelve month operating cash flow of $2.063 Billion and had $1.231 Billion in Capex. That equates to $832 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 17%.

Something else worth keeping in mind is AU Optronics’ annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $6.140 Billion in equity for the quarter ending March 2017 and $6.425 Billion for the quarter ending June 2017. If we divide that number by two we get $6.282 Billion in average equity. If we consider that the company has $1.137 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 18%.

In terms of AU Optronics’ current valuation, the company is trading on a P/E of 3.2 compared to its 5Y average of 19.2**, a P/B of 0.6 compared to its 5Y average of 0.7**, and a P/S of 0.3 compared to its 5Y average of 0.3**. The company has a FCF/EV Yield of 17% (ttm) and an Acquirer’s Multiple of 3.79, or 3.79 times operating earnings*. AU Optronics has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 18% and provides a dividend yield of 3% (ttm). All of which indicates that the company is undervalued.

** Morningstar

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