Himax Technologies Stock Is Poised To Rise Again (NASDAQ:HIMX)

My Thesis

Thanks to its improving fundamentals, cheap valuation, and industry tailwinds, I believe Himax Technologies, Inc. (NASDAQ:HIMX) stock is well-positioned to rally in the coming months.

My Reasoning

Founded in 2021, Himax Technologies, Inc. is a Taiwanese semiconductor company specializing in display imaging processing technologies. It produces display driver ICs, timing controllers, touch sensor controllers, and other components for various electronic devices. The company’s products are used in applications like televisions, laptops, mobile phones, automotive displays, and augmented reality devices. Himax also provides image sensors and optics for 3D sensing and IoT devices.

The behavior of the HIMX share was an indicator of the behavior of the company’s revenues and reflected demand during a certain period. That is, before revenues peaked in 2022, HIMX’s stock price had increased almost six-fold in less than two years. But then the company began to experience a serious margin contraction due to inventory headwinds, which ultimately reduced operating performance significantly, and the downward movement of the share price reflected this in advance:

However, analysis of the latest data makes it clear to me that HIMX’s poor stock price performance is probably coming to an end and that the stock should continue to recover in the new year.

In the Q3 FY2023 update for Himax Technologies, the company reported that its third-quarter revenues and profit exceeded guidance. Revenues were $238.5 million, a 1.5% sequential increase and a 11.6% YoY increase. Gross margin was 31.4%, higher than the previous quarter, driven by the absence of one-time expenses and a favorable product mix, particularly in the automotive product line. Notably, the automotive business remained the largest revenue contributor, accounting for nearly 45% of total sales. As a result of higher margins, Himax’s diluted EPS figure of $0.06 turned out to be higher than the guided range of $0.015-0.06 cents per share.

Himax’s large display driver segment saw a decrease in revenue. In contrast, the small- and medium-sized display driver segment experienced an increase, driven by strong performance in the automotive sector and TDDI products. Non-driver sales exceeded guidance, primarily due to higher shipments of WLO and CMOS image sensors.

The operating income was $11.1 million, and the after-tax profit was $11.2 million or 6.4 cents per diluted ADS. Himax reported $155.4 million in cash and other financial assets as of September 30, 2023. The company noted ongoing measures to reduce costs and exercise strict budget control amidst macroeconomic challenges. To be fair, I should note at this point that the amount of cash on the balance sheet has been decreasing for several quarters in a row, while debt continues to grow, driving up the leverage ratio. But as you can see in the chart below, the most recently reported D/E ratio does not look critically high. If the company gets a growth catalyst in the form of strong end-market demand or something else, management’s words will most likely come true.

Looking ahead to Q4 2023, Himax’s management anticipates a decline in revenues of 5.0% to 11.0% sequentially, with a gross margin of ~30%. Profit attributable to shareholders is estimated to be 9.0 to 13.0 cents per fully diluted ADS. The company highlighted challenges in the end market demand and cautious inventory management affecting Q4 sales growth. Despite this, the long-term outlook for the automotive business remains positive, especially in TDDI and local dimming Tcon.

However, from the questions asked by Donnie Teng (the only analyst present from Nomura Securities), we learned that Himax’s average selling prices (ASP) are stabilizing. Nevertheless, pricing pressure could persist due to macroeconomic conditions and customers’ profitability issues. He also discussed the strategic alliance with Nexchip and emphasized that the focus is on the automotive display sector. I think it will be easier for the company to control its margins in the future, which will lead to higher profits and thus a higher dividend payout when demand in the end markets recovers.

And when I talk about dividends, these are not just nice words about the possible future. Historically, HIMX does not skimp on dividends when the industry is doing well. As it is a cyclical business, we should not limit ourselves to TTM figures when forecasting dividends. In the case of Himax, the TTM dividend yield is 7.8%, which is already good. However, if we look at the dividend yield for the next year (based on the consensus), the picture is getting much more interesting: the yield of 7.8% rises to almost 14%, making HIMX shares extremely cheap for a medium-term (1-3 years) holding:

At the beginning of the year, management expected the second half of the year to be stronger than the first, and judging by the surprises in sales and profits in the third quarter, this is exactly what is happening. The company terminated high-cost foundry capacity agreements, incurring one-time early termination expenses impacting Q2 gross margins, which came in at 21.73% at the time. The reduction in inventories continued in the third quarter and the gross margin rose to 31.37% QoQ.

If current operating trends continue, I expect HIMX’s dividend yield to decline from ~14% due to valuation adjustments – if the cycle turns, the market is not ignoring it. Furthermore, if we look at classic valuation metrics such as P/E or EV/EBITDA, we see that HIMX is trading quite cheaply at the projected EPS growth we see today. So there’s room for that adjustment to take place as far as I can see.

That’s why it is worth buying companies like Himax before the cycle turns. That is, before the market starts to reassess its prospects pushing down the yield.

Risks To Consider

The semiconductor industry’s rapid technological evolution and cyclical demand expose HIMX to industry dynamics and consumer preferences, impacting its financial performance.

Customer concentration poses a risk, as a significant portion of revenue relies on a few key clients, subjecting the company to its financial health.

In 2022, Customer A and its affiliates accounted for 32.3% of our revenues. Our two largest customers together accounted for over 40% of our revenues in 2022.

Source: HIMX’s FY2022 report

Supply chain disruptions, technological innovation challenges, currency fluctuations, and geopolitical events, such as trade tensions, pose additional threats.

Regulatory changes, macroeconomic fluctuations affecting consumer spending, and execution risks in strategy implementation and product launches also contribute to the risk profile.

The company’s financial health, including increasing debt levels and liquidity constraints, as well as stock market volatility, further underscores the need for investors to conduct thorough research and consider these multifaceted risks in their investment decisions.

Your Takeaway

Despite relatively negative financial results in recent quarters compared to the recent past, I believe the company’s business is showing clear signs of a turnaround. Margins are improving, inventories are getting smaller, which is good. End markets are also likely to show stronger growth shortly, and the company’s focus on and significant presence in the automotive industry should help HIMX continue to recover.

The company’s low valuation looks attractive for a medium-term investment, as does the dividend yield of 14% for the next year.

Based on the above and despite the risk factors, I recommend investors consider buying HIMX stock.

Good luck with your investments!