Touch That! TPK Parlays Consumer Fascination with Tablets Into An Improving Outlook for Profits

Even if consumers are swapping their PCs for tablets, the one constant will be their demand for touch screen devices, and Taiwan-based TPK Holdings is well positioned to profit from that and capture additional market share going forward.

Two of the most buzzed-about topics in the technology world these days are the slowdown in the rate of growth of smartphones, and the prospect that the personal computer may be on its deathbed. If there is a single technology that can revive demand for both of these and also spark fresh interest in upcoming generations of tablet computers, however, it is an improved “touch” screen experience.

That is good news for TPK Holdings (3673.TW), a Taiwan-based manufacturer of touch screen film, the coating that enables these touch screens on your smartphone, your tablet and – increasingly – your PC, to function better and better with each new round of innovation. For now, sales of personal tables like Apple’s (AAPL.O) iPad and the Amazon (AMZN.O) Kindle continue to grow rapidly, and soon, a new wave of PCs with touch screen capability are likely to at least temporarily revive consumer interest in these devices. In all cases, demand for TPK’s products certainly seems likely to remain robust.

Analysts have increased their estimates for the company’s earnings for 2012, from less than 40 Taiwan dollars (NT$) per share for the year just 90 days ago to NT$42.18 per share today. (TPK is scheduled to release its results on February 25; last year, the company’s earnings for the full year totaled only NT$26.51 per share.) The SmartEstimate is higher still, however, at NT$43.99, giving TPK a positive Predicted Surprise of 4.7%, suggesting that the odds are high that the company will report a positive surprise or that analysts will further boost those estimates in the weeks remaining before the earnings announcement.

Since the beginning of December, every analyst that has updated his or her estimate has increased the outlook for TPK’s year-end profits. Moreover, during the course of the last 90 days, they also have boosted their outlook for revenues for the just-ended year by 22%, and increased their forecasts for revenue in the current year (ending in December 2013) by 11%, a sign that analysts are optimistic not just about past results but about the company’s potential to generate solid results in the future as well.

Admittedly, TPK does face a number of rivals in the touch screen technology space, as more competitors look for a way to profit from demand for this kind of application. But analysts appear to agree that TPK has the most effective production line (with the highest yield rates when it comes to producing the film that can be attached to glass to enable touch capability). Moreover, demand far outstrips the ability of TPK to deliver the film laminate required for the touch technology to function.The fact that supplies are so tight while demand remains so robust means TPK will be able to increase its capacity and capture more market share.

The company’s fundamentals are in line with those characteristics that institutional investors currently prize, as indicated by TPK’s strong score of 95 out of a possible 100 on the StarMine SmartHoldings Model.That means that the company is likely to pop up on the list of potential investment ideas when institutional investors screen their universe of investable stocks in search of places to allocate some of their capital, and it may mean that buying interest grows as some of those investors act on this signal.

TPK Holdings isn’t without its challenges, however. The company has seen its inventory days (see chart above) increase steadily over the last eight quarters; that figure has more than tripled over that period rising from only 12 days to 38 days. That could be a sign that the company isn’t managing its inventory levels as well as it could, even as it increases production levels. It also could be a sign that TPK is building up inventory ahead of major new product releases, like the iPad mini or the touch screen PCs. And in another worrying sign, as TPK has boosted production by building new facilities, the company’s free cash flow has turned negative.

This doesn’t change the underlying bullish scenario that analysts have identified, however. When that new capacity comes online later this year, the probability is that TPK’s cash flow will stabilize. In the meantime, strong demand and a tight supply situation are likely to guarantee that TPK’s earnings will beat analysts’ estimates for the just-ended 2012 period.

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