Why Himax’s Bad Days Will Continue

Himax Technologies (NASDAQ: HIMX  ) had a good time last year on news that it will be supplying LCOS microdisplays to Google (NASDAQ: GOOGL  ) for Google Glass. But the stock had gotten ahead of its fundamentals, and investors were buying more shares under the belief that Google Glass will lead Himax to the promised land. Despite a slowdown in revenue and a string of bad quarterly results, Himax shares climbed higher. But those days are over.

Facing the reality
Toward the end of last year, it was clearly evident that Himax will drop, and the company's fundamentals will eventually catch up with the stock price. In 2014, Himax is down 17%. Moreover, Bank of America put out a massive downgrade when it cut Himax's rating from buy to underperform, delivering a crushing blow to Himax investors who were betting on Google Glass. The stock crashed 16%, and with the way things stand, that could continue south.

Himax is trading at 33 times trailing earnings, despite the beating that it has taken this year. For a company that reported just a 2.40% jump in revenue in the previous quarter and a 7.20% increase in earnings, this is an expensive valuation. In fact, for the whole of 2013, Himax reported $770.7 million in revenue, up just 4.5% from the previous year. Thus, the stock kept on rising based on optimism about Google Glass, while financial growth stagnated.

More than just Glass
It seems like no one has been paying much attention to Himax's current bread-and-butter businesses. Large-panel display drivers have been struggling, and that business was down 25% in 2013. Looking ahead, Himax expects "some growth" in this segment in the short term, due to new customers. Himax is pinning its hopes on higher sales of 4K televisions this year.

According to NPD DisplaySearch, manufacturers of 4K TV LCD panels are looking at strong sales in 2014, with shipments slated to rise to 12.7 million units from an estimated 1.9 million units last year. China is the leader in 4K TV sales with around 80% of shipments, and since Himax has numerous China-based manufacturers as clients, it could see a turnaround in its large-panel business.

But Himax's small-panel drivers have been growing at a brisk pace, primarily due to smartphone sales in China and the rollout of LTE in the country, which will lead to higher demand for handsets. Himax is looking at better margins from sales of high-resolution panels, but this will be offset by low-end smartphone panel sales.

There is intense competition in the budget smartphone market in China that could result in margin erosion. Himax will be employing cost-reduction measures to support its margins, but if things don't turn out as planned, Himax's earnings could take a hit, as the small and medium-sized display panel business accounts for 54% of overall revenue. 

The heart of the matter
What's most surprising is that Himax's non-driver products business -- with 16% of overall revenue -- is why investors are betting big. Himax manufactures image sensors and LCOS microdisplays through this segment, which means that it will be the biggest beneficiary of Google Glass in the future. However, success is never guaranteed, and the commoditization of the image-sensor market, where there are bigger companies such as Sony and Samsung, could trouble for Himax.

The company is already seeing margin pains in this segment due to oversupply, and there could be more trouble this year, as Google won't be releasing Glass anytime soon. Google is still working on making the design of Glass more acceptable, so that people wearing it don't look like sci-fi movie characters. As such, it has teamed up with Luxottica (NYSE: LUX  ) , the maker of Ray-Ban and Oakley, to make them look "normal." 

Moreover, Luxottica's retail outlets should help Google get Glass sales off the ground. However, given the premium nature of Luxottica's brands, Google Glass might not be a mainstream product anytime soon. Also, it could cost more than a high-end smartphone without delivering the full functionality of one. This will be a big deterrent, since Luxottica's sales are being driven by the emerging markets, where a high-priced Google Glass has a high chance of failure.

The bottom line
There is no certainty as to how much the Google Glass will sell once launched. So, Himax investors should focus more on the company's fundamentals rather than get emotionally attached with it. Himax could be a great growth story once again, if Google Glass clicks, but until then, it won't be surprising if it continues to go south.

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Read/Post Comments (16) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2014, at 4:18 PM, santoshps wrote:

    are you a crony for BOA?

    Also, substantiate bad earnings reports that you talk off?

    They beat on revenue and came in line on EPS

    2/19/2014 Q413

    est actual

    $0.10 $0.10

    $193.31 million $195.20 million

  • Report this Comment On March 31, 2014, at 4:51 PM, traderguy wrote:

    Wow the author of this article had picked Himx and made 300% on it and now he wants to create a negative sentiment and make 300% more :) LOL.

    Check his profile which states that.

    Best Pick HIMX (+292.81)

    Worst Pick SOL (-51.09)

    I believe such manipulative articles should be blocked and the author should be banned. He is doing exactly similar to Bofa/ML. Make money on a stock and when you are out of it start bashing.

  • Report this Comment On March 31, 2014, at 5:03 PM, santoshps wrote:

    and check this out, Bank of America was the 3rd largest institutional holder of Himax as recent as 12/31/13. what suddenly changed in 3 months.

    They must have sold their shares when Himx reached 15.6 and put this underperform tag to shake off retail investors and get the shares cheap. what else? total manipulation

    Google has a 6% stake in Himax with an option to get upto 15%, the company pays dividend.

    do your own DD. perfect time to accumulate stocks

  • Report this Comment On March 31, 2014, at 5:05 PM, santoshps wrote:

    http://www.insidermonkey.com/blog/himax-technologies-inc-adr...

    This is the link from last year. Same author calling the company a class with or without Glass.....and he is bashing it now.

  • Report this Comment On March 31, 2014, at 6:24 PM, sidsorbie wrote:

    Harsh Chauhan How much is BOFA and Merrill paying you to write these articles.

  • Report this Comment On March 31, 2014, at 7:54 PM, santoshps wrote:

    Motley

    Please ban this author and block his articles in future.

    this is my humble request

    Thanks

  • Report this Comment On April 01, 2014, at 4:39 PM, TechJunk13 wrote:

    To all,

    Thanks a lot for reading. Let me bring some more insight to you. I wrote the following article more than 2 years back, when many of you might not have even heard of Himax.

    http://www.fool.com/investing/general/2012/02/23/why-himax-t...

    The stock wasn't enjoying any of the Google Glass "euphoria" at that point of time. And at that time, it was a buy. At this time, it is not. It has outgrown its fundamentals and revenue growth isn't as great as it used to be. It is running on hype now.

    I can understand that some of you have been hurt by Himax's downfall this year, but sadly, there isn't any reprieve in sight.

    Just because I have written good things about Himax in the past doesn't mean that I will be blinded and ignore key issues that the company faces. And santoshps, traderguy, and others, I can not even dream of getting paid bu BoFA for anything. And if you have better arguments, please feel free to contribute your own thoughts in the form of an article as a counterargument rather than hiding behind aliases and firing your guns.

    Thanks,

    Harsh

  • Report this Comment On April 01, 2014, at 6:36 PM, JAVKO wrote:

    These people at Motley Fool just go with the flow as they have no idea of anything whatsoever.

    On any day, you can see an analyst downgrade and MF bashes. Another day, an anakyst upgrades and they bump!

    I really wonder who are the real FOOLS that pay a subscription to this useless site?

  • Report this Comment On April 01, 2014, at 6:39 PM, JAVKO wrote:

    And FYI, some of us bought HIMX stock at around $2, long before any of you had ever heard of HIMX.

    And if you had, you would have discarded it as "Chinese", not even knowing where the Co is from.

    Finally, have a look at Apple buying RENESAS!

    Would you like the link?

  • Report this Comment On April 01, 2014, at 11:37 PM, santoshps wrote:

    Harsh

    I debunk your reply. The link I posted above is from 2013 - you clearly mention that with or without glass, this company is a class.

    thats just last year, not 2 years back.

    again as traderguy mentioned, this was a favorite stock of yours as seen in your own profile .....+290% or something like that. you must have dumped all your stock and tried to create false panic now to buy cheap shares....

    pasting the link below again for your own reference.....

    http://www.insidermonkey.com/blog/himax-technologies-inc-adr...

    My questions to you

    1. the timing of your article - after the stock falls on a BOA downgrade (btw, this company downgraded micron shares as recently as a week back calling it underperform with a 19$ PT, the only odd man out to downgrade Micron. all others have upgraded Micron.

    same applies to himax...everyone else - credit suisse, Northland upgraded HIMX.

    How come this article of yours DID NOT COME OUT when it was at its all time high of 16$. Did you get a sudden vision after it had fallen to 12$ that this is overpriced.. BE ETHICAL IN YOUR WORK

    2. Google ties up with RayBan, Oakley and Luxotica to make the Glass more fashionable. If this is not a commitment on part of Google for Glass, what else is it.

    How does it in make Himax business any weaker..it should make it stronger

    3. DONT CLAIM CREDIT FOR DISCOVERING HIMAX.... YOU WILL BECOME A LAUGHING STOCK

    Many have held long pos before you "discovered" Himax for us....

    4.Himx went up 4% AFTER YOUR ARTICLE.

    YOU ARE ALREADY ON IGNORE

    so, my sincere advise, quit this and get another life

    Yours faithfully, well wisher

  • Report this Comment On April 02, 2014, at 12:32 AM, santoshps wrote:

    Harsh

    >> rather than hiding behind aliases and firing your guns.

    btw, I am not hiding behind any aliases

    My name is Santosh and thats also my login name

    do your DD before you come up with baseless allegations like this..

    shows your quality of work both in your comments and also in your article....cheap thats about it

  • Report this Comment On April 02, 2014, at 3:43 AM, TechJunk13 wrote:

    All,

    Of course I had mentioned that Himax is a stock worth buying, but when the stock outgrew its fundamentals, I knew it was not a good buy anymore as you can see here.

    http://beta.fool.com/techjunk13/2013/07/25/the-euphoria-arou...

    Of course, Himax is one of my top picks in the CAPS game, but that's a game after all and not a real position. And, I do NOT hold any position in the company as the disclosure states. In fact, I do not have any position in any stock listed in the U.S.

    Next, as I said, if a stock is a buy once, it cannot be a buy forever. And as far as the timing of the article is concerned, I cover it quite regularly, about once a quarter, and not on a short-term basis. Any new investor who would be thinking of buying Himax now will burn their hands since the stock is overpriced as compared to the industry average P/E. Short-term movements of 4% are really nothing if we look at the long-term picture.

    And of course, I haven't discovered Himax. But I did call it a buy due to its cheap valuation and high dividend yield both 2 years back and also early last year. But now, growth isn't as great as before. So, in my opinion, it isn't a buy anymore. Thanks for all your feedback, comments, etc.

    Also, the company has $105 million of debt and just $128 million in cash. Also, its levered cash flow is in the negative according to Yahoo! Finance.

    Opinions change, and so did mine on Himax. When it was a buy, I called it a buy. When it isn't, I cannot do the same and pump the stock, which is impossible to do given that Himax's volume is in the millions.

    Thanks

  • Report this Comment On April 02, 2014, at 11:10 AM, santoshps wrote:

    >> And as far as the timing of the article is concerned, I cover it quite regularly, about once a quarter, and not on a short-term basis.

    I agree that you dont cover it regularly.

    But, if your article came out in December of 2013 when the stock hit $15 and called it overpriced, I might have agreed with you. why did this article not come out back in December OR when it hit 15 after Credit Suisse and Northland upgrades.

    Why after BofA downgrade? Dont you have your own opinions or all you do is to tag on to someone?

  • Report this Comment On April 03, 2014, at 4:36 PM, santoshps wrote:

    what do you have to say today...nothing eh

    a -1% nasdaq day and Himx ended a 1% up....what a joker

    foot in the mouth statement he?

  • Report this Comment On April 14, 2014, at 5:39 PM, famousstocks wrote:

    With the help of fool.com himax becomes a dump and pump stock.

    I stay long even if it get's dumped now.

    2 third of my position sold at 14.40$

    The analysts think that the retail investors are to stupid to think themselves.

    If it get dumped to 5$ i will make an ALL IN, because google glass will be great.

    look at the stupid people running around with the smartphones in one hand starring at it.

    This problem will be solved with google glass

  • Report this Comment On May 09, 2014, at 10:59 PM, GeistChan wrote:

    A lot of people really scold you for making the right call. I'm wondering what's your take now and if next year projection still hold.

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