Flat-Panel Prospects Burn Bright


By Colin McArdle This holiday season, consumers may tighten their purse strings more than in past years, mainly due to high oil prices and rising interest rates. The latter appear to have curbed consumers' appetite for big-ticket items, including cars, airplane tickets, and consumer electronics.

Although we at Standard & Poor's think the jury is still out on the pace of consumer spending on discretionary items for the rest of this year, gasoline prices have recently dropped, and the cost of one hot household technology -- liquid crystal display TVs -- has also fallen. The question is: Will more Americans be enjoying this year's Super Bowl on an LCD TV? We think the answer is yes.

By all accounts, flat panels are cannibalizing sales of traditional TV sets. Sales of LCD TVs are expected to reach 1.85 million in China alone this year, according to the China Industrial Association of Electronics & Audio Visual Products. In that market, average selling prices (ASPs) for 32-inch LCD TVs fell by more than half this year. We think complimentary technology offerings, including high-definition TV (HDTV), video on demand, digital video recording, digital TV, and many other applications will spur demand for new sets among technophiles.

PRICE SHIFT. For the majority of Americans, the bigger determinant is price. According to our channel checks, the average selling price for a 32-inch LCD set is approximately $1,700. We expect steeper discounting through the end of the year to push prices closer to $1,000, a figure that, in our view, represents the inflection point at which consumer household upgrades take place (see BW, 9/12/05, "War of the Screens").

While the timing of such changes is always difficult to forecast, we believe it's a matter of when, not if. For investors looking to capitalize on this trend, we wouldn't necessarily highlight the consumer-electronics manufacturers. As illustrated by Sharp Electronics' most recent publicly released financial results, price wars can wreak havoc on a company's bottom line.

However, we think a second derivative play can be found in the suppliers of the glass panels for these TVs, such as L.G. Philips LCD (LPL

; ranked buy; recent price: $19). The competitive landscape in this area remains much less cluttered, and sales are characterized by long-term supply agreements among several large providers.

TV STAR. LPL was created through the 1999 joint venture of LG LCD, a division of LG Electronics, and Philips Electronics (PHG

; ranked buy; $26). The South Korea-based company designs, manufactures, and supplies thin-film liquid crystal display (TFT-LCD) panels in a variety of sizes for consumer-electronics applications, including notebook computers (25% of 2004 sales), desktop monitors (56%), and TVs (14%), as well as handheld consumer products including mobile phones, GPS navigation systems, medical and industrial displays, and automobile displays.

TV panels, which LPL added in 2001, range in size from 15 to 55 inches. LPL believes this will be the fastest-growing product segment in the next few years, as consumer demand for wide-screen, flat-panel TVs grows worldwide. Display panels for notebook computers range in size from 21.1 to 17.1 inches in a variety of display formats. Desktop monitors range in size from 15 to 30 inches, with a variety of display resolutions. LPL also develops small and midsize TFT-LCDs for use in handheld consumer-electronics applications.

WILL CONSUMERS BITE? LPL shares recently traded at 1.8 times trailing 12-month sales per share, which represents a 20% discount to their historical average. We derive our 12-month target price of $24 by applying a p-e-to-growth ratio of 1, in line with peers, with a projected 26% growth rate, to our 2006 earnings per ADS estimate of 92 cents.

Risks to our recommendation and target price include a weaker consumer-demand environment than we anticipate, as the twin effects of higher oil prices and higher interest rates could negatively affect discretionary spending worldwide. We also see the possibility that higher material costs that cannot be passed on to consumers could impair profits. Lastly, LPL has customer-concentration issues, in our view, with three customers representing more than 10% of sales in 2004.

Required Disclosures

S&P Global STARS Distribution

In the U.S.

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.7% of issuers with buy recommendations, 60.3% with hold recommendations and 11.0% with sell recommendations.

In Europe

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.8% of issuers with buy recommendations, 44.8% with hold recommendations and 20.4% with sell recommendations.

In Asia

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 28.1% of issuers with buy recommendations, 51.1% with hold recommendations and 20.8% with sell recommendations.

Globally

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 29.3% of issuers with buy recommendations, 57.7% with hold recommendations and 13.0% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index, in Asia the S&P Asia 50 Index, and in Malaysia the KLCI or KL Emas Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; in Sweden by Standard & Poor's AB ("S&P AB"), in Malaysia by Standard & Poor's Malaysia Sdn Bhd ("S&PM") which is regulated by the Securities Commission and in Australia by Standard & Poor's Information Services (Australia) Pty Ltd ("SPIS") which is regulated by the Australian Securities & Investments Commission.

The research and analytical services performed by SPIAS, S&P LLC, S&P AB, S&PM and SPIS are each conducted separately from any other analytical activity of Standard & Poor's.

LG. Philips and Philips Electronics are not customers of S&P or its affiliates.

Disclaimers

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

Analyst McArdle follows technology equipment stocks for


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