Why AU Optronics Stock Popped 14% This Morning

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What happened

AU Optronics (NYSE: AUO) stock popped more than 14% in early trading Wednesday after analysts at investment bank Morgan Stanley highlighted the Taiwanese LCD panel maker as one of two great big bargains in the tech space. (The other one being fellow LCD panel maker LG Display (NYSE: LPL), which makes even more panels than AU Optronics does).

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So what

Here's Morgan Stanley's argument in a nutshell: Both LG Display and AU Optronics are cheap, and have become cheaper in recent weeks. (In fact, both stocks are trading close to where they were five years ago, having largely missed out on the long rally in S&P 500 equities).

This makes some sense given the long-term trend of falling prices for flat-screen televisions and their components. However, Morgan Stanley believes that LCD panel prices are likely to stabilize, while demand for LCD TVs is on the upswing. Both of these trends -- assuming they come to pass -- should result in stronger sales and stronger profits for the panel makers.

Now what

At AU Optronics in particular, Morgan Stanley expects investors will see sales "revive in Q2 and Q3" of this year. At the same time, gross margins should improve as TV buyers pay up for "premium" LCD TVs featuring higher resolution and curved screens. This positions AU Optronics to book stronger net profits in 2018 and beyond. In fact, analysts surveyed by S&P Global Market Intelligence are predicting 25% annualized earnings growth at AU Optronics over the next five years.

In Morgan Stanley's view, the 3.8 times earnings valuation investors are attaching to AU Optronics stock today, and the 3 times free cash flow multiple, are far too low for a stock with this much potential. Morgan Stanley thinks the stock is a buy -- and I agree.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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