Down 60% in 2014, Himax Technologies Is Finally a Value Play

Himax Technologies (HIMX 0.10%) is supposed to be the poster boy of Google's (GOOG -2.60%) (GOOGL -2.44%) Glass. The stock ran up tremendously as a result, reaching 52-week highs in March, and outpaced its fundamentals. However, Himax has been brought down to earth. As of this writing, Himax shares are down close to 60% in 2014. The stock has been plagued by a series of downgrades, with UBS joining the list last month when it cut its target price to $5.60 from $13.70.

In fact, there were unconfirmed reports in May that Google might stop using Himax chips in the Glass. But, so far, there has been no evidence that Himax will lose its Google spot. However, there is a general consensus among analysts that Himax is going to see short-term issues. Weak sales of 3G smartphones and televisions in China, along with the delay in the Google Glass launch are expected to weigh on Himax.  

In value territory
The company is slated to release its second-quarter results on August 7, and these issues will certainly impact its financial performance. Himax's revenue is expected to decline 6% year-over-year, though its earnings are expected to increase marginally to $0.14 per share from $0.11 last year. But then, Yahoo! Finance estimates suggest that Himax will perform well in the long run, with an expected annual earnings growth rate of almost 40% for the next five years. 

As such, Himax can possibly be a value play. The stock is trading at 16 times last year's earnings, while the forward P/E is 11. Additionally, the PEG ratio is also attractive at just 0.33.

Smartphones and TVs can drive growth
Google Glass is not the only driver of Himax's prospects. Since its small panel display drivers are used in Chinese smartphones, the company can benefit from the increasing adoption of LTE handsets in the Middle Kingdom. On the previous conference call, Himax's management said that LTE adoption in China is gaining momentum, and manufacturers are adopting more high-definition resolutions that will drive demand for Himax's panels. 

Himax has a diversified customer base in the Chinese smartphone market, with no customer accounting for more than 10% of business. Going forward, this will be a big opportunity for Himax to tap. LTE smartphone shipments are expected to increase a whopping 547% in China to 135 million units this year, according to Strategy Analytics. Moreover, as more Chinese telcos deploy their LTE networks and transition customers to the latest handsets, strong growth can be expected beyond 2014 as well.

However, this transition will hurt Himax in the short run. According to Chardan Capital Markets, 57% of Himax's small display driver revenue came from 3G smartphones. The move to 4G handsets will create a short-term depression. Moreover, Himax has already spoken of a price war in the Chinese smartphone segment, so this is another concern to look out for. 

In the large display driver business, Himax should see tailwinds as a result of the rising adoption of 4K televisions. UBS might have downgraded Himax citing weak television demand in China, but the overall prospects look strong. According to NPD DisplaySearch, 4K TV shipments are expected to jump to 13 million units this year from just 1.9 million units last year. China will have a 78% share of this market.

Head-mounted display prospects
Finally, coming to Google, it would be wrong to count on the Glass to be the sole driver of Himax's growth in the future considering the apprehensions around the product. Himax's non-driver business is the one expected to benefit from the Glass, and it accounts for 18% of total revenue. So, there's still some time before it becomes big enough to propel Himax's overall revenue. However, this segment is growing at a solid pace. In the previous quarter, it was up 45% year over year.

But putting this growth down to Google would not be wise. Himax is working with "some new top-tier customers who started focusing intently on head-mounted technology product development." So, it is likely that Himax has diversified beyond Google to benefit from head-mounted displays. But then, the potential of the Google Glass cannot be ignored.

Google trying to make Glass less "geeky"
Google is looking to make the Glass a mainstream product, and entered into an agreement with Luxottica earlier this year. Together, both companies will concentrate on creating a fashionable version of Google Glass, and this might be the reason why the actual launch has been delayed so far. Luxottica's press release stated that the two companies will "establish a team of experts devoted to working on the design, development, tooling and engineering of Glass products that straddle the line between high-fashion, lifestyle and innovative technology." 

As such, if Google is able to crack the mainstream market for head-mounted displays, in association with Luxottica, then Himax will have another catalyst to drive growth. But the good thing is that even if Google Glass is ignored, Himax seems to have enough catalysts.

The bottom line
Himax has been beaten down badly this year, but the stock is in value territory now. Also, it might not get much worse for Himax from here. As such, it might be a good time to take a closer look at it.