Robert W. Baird upgraded its rating on shares of Diodes Inc. (NASDAQ: DIOD) to outperform from neutral on attractive valuation. The brokerage raised its price target on shares of the supplier of components to chipmakers to $32 from $20.

We upgrade Diodes on attractive valuation, notably versus peers, our expectation for Diodes to gain market share this year, our initial checks pointing to rebounding analog bookings, lean inventories in the Asia distribution channel, and tight expense controls, said Tristan Gerra, an analyst at Robert W. Baird.

Gerra said Diodes is one of the very few companies investing in discrete/standard analog capacity at a time when lead times in this category remain elevated, boding well for market share gains.

Gerra expects Diodes to gain market share this year, notably in discrete/standard analog where lead times remain elevated and most competitors are not investing in new capacity.

Gerra said his initial checks point to a firming of analog bookings, boding well for second quarter, in his view. Inventory levels at Asia-based distributors remain lean, in Gerra's view. Industry lead times are trending flat to slightly up, in Gerra's view, suggesting no hangover post Chinese New Year.

Gerra said the company's first quarter guidance demonstrates tight expense controls, with an operating expense guidance below his previous expectation. Stock has significantly underperformed peers over the past few months, despite continued strong fundamentals.

Gerra believes the stock should return to 2006-2007 valuation levels (14-15 price-to-earnings), notably given the higher gross margin levels he expects this year versus historical levels.

The Dallas, Texas-based Diodes reported fourth quarter GAAP earnings of $0.52 a share, well above Robert W. Baird's estimate of $0.45 and consensus of $0.46. Pro forma earnings including stock-comp was $0.55 a share. Fourth quarter revenue of $163.8 million (down 0.4 percent sequential) was about in line with the midpoint of the guidance. Gross margin of 38.3 percent was above guidance, up 90 basis points sequentially.

The midpoint of first quarter of 2011 revenue guidance of $156 million to $164 million (down 5.0 percent to flat sequential) is above Robert W. Baird's previous estimate of $149.8 million and consensus estimate of $156.7 million. The midpoint of first quarter gross margin guidance of 35.5 percent to 37.5 percent is above Robert W. Baird's estimate of 35 percent and consensus estimate of 36.2 percent.

Our $32 price target for DIOD shares, up from $20, is based on the company trading at 15 to 16 times of our new 2011 pro forma EPS including stock compensation estimate of $2.05. The multiple we use is about in line with average price-to-earnings levels for Diodes in 2006-2007 (pre-crisis levels), which could be conservative given the company's higher gross margin outlook we foresee this year versus historical levels, said Gerra.

The brokerage raised its 2011 EPS estimate for Diodes to $2.05 from $1.37, while maintaining its 2012 estimate of $2.30.

Diodes stock gained 3.98 percent to $26.66 in the pre-market trading on NASDAQ stock market.

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