Among reports surfacing that Google (GOOG) will be using Samsung's (GM:SSNLF) OLED display technology for its consumer version of Google Glasses, many Himax (HIMX) longs may be about to lose their shorts.
I believe longs should view this as an opportunity to purge the stock of any fools who purchased on Google Glass rumors, and perhaps pick up more shares on a slight (is that the right word?) dip in the stock's price during the near-term. Although you should probably just get out now if you have a weak stomach...
Here, we see a somewhat monstrous spike in volume precipitated by Mark Gomes's early articles which speculated that Google would be using HIMX's LCOS color-filter technology. The story made sense. HIMX is believed to be the market leader in the LCOS industry based on 2012 market share, and is the only non-captive LCOS company that owns a mass production-ready liquid crystal assembly line (page 39). HIMX has invested millions in R&D spending to support its LCOS technology. On top of this, Karl Guttag (a well-renowned industry veteran who spent a lot of time at Texas Instruments) speculated and "confirmed" that Google was indeed using HIMX's color LCOS technology based on a picture and a video of wearer's testing the Glass prototype. It's funny, because as I write this looking for his article confirming the HIMX-Google relationship so that I can cite my source (note I was just reading the article over maybe 4-5 hours ago), it appears that Guttag has already deleted the article over fears of his credibility taking a hit. I was able to track down a copy of his posts from InvestorsHub however, along with the pictures he referred to when confirming the HIMX supply agreement which are included in that link.
While the Glass story turned out to be a bust, let's face it, if you went long HIMX because you thought they were a supplier to Google Glasses, you are a fool. LCOS would have barely moved the needle for HIMX… this may be extremely contradictory of me to do, but since I have no other convenient data points available, I'll use Guttag's projections for LCOS profitability per pair of Glasses sold and hope that he was at least in the ballpark there. He estimated that HIMX's revenue per unit would be around $20-$25, and the cost would be $15 per unit in volume. Take the high end of the revenue range and you have a $10 profit per panel. If Google sold 2m units in its first year (a long shot given how expensive they are combined with the unemployment rate), this would be just $20m in incremental operating profit for HIMX and that is assuming the very top end of both the profit potential per panel and the annual unit Glass sales. Not only do the numbers not justify it: the fact that you bought based on an internet blogger's speculation is a terrible way to invest. Unless you are an expert on HIMX's LCOS technology or Samsung's OLED technology, there is little reason to invest based on those things alone.
While I am not long HIMX for the LCOS technology (although it is a nice perk given the oncoming wave of wearable computing technology), the LCOS panels seemed to make more sense for Glass given (1) less strain on a wearer's eye (making them more "ergonomic") and (2) Samsung will be in direct competition with Google in the near future on wearable computing and it seems fishy that Google would allow a major competitor to supply a major component for a major product.
So what's left to like about HIMX?
… a lot actually. In 1Q13, the company matched its 4Q gross margin on an 8% lower revenue base in the face of a seasonally weak 1Q and less calendar days in the quarter. HIMX's margins continue to chug upwards as Chinese consumers switch from low-margin feature phones to smartphones, where HIMX believes it has an advantage as the technology becomes more and more complex, effectively shutting out other suppliers. A shifting mix favoring small/medium display driver products, as well as higher-margin non-display driver products is also helping to push margin upward and has allowed operating margins to expand to over 10%. All the while, EPS has grown at an average of 247% using 4 of the last 5 quarterly yoy results (3Q12 excluded because it was 1,588% growth due to the 3Q11 comp period only being $0.6m in net income), and also grew five-fold (+393%) in FY12.
"We had an extremely successful first quarter, with revenues, gross margin and net income all exceeding the initial guidance we provided on February 7, 2013," stated Mr. Jordan Wu, President and Chief Executive Officer of Himax. "We are pleased with the top and bottom line performance of the first quarter of 2013. Even during this low season, we achieved improvements in both margins and profitability. We will continue to execute our strategy by further diversifying our product mix and expanding our customer base. We are excited about future growth opportunities."
Note that management believes the non-driver segment growth of 6.2% yoy was unsatisfactory and chalked it up to a "temporary setback", indicating they were expecting even higher margin in 1Q than the 170 bps yoy improvement and the 130 bps sequential improvement. Management provided exciting guidance for 2Q: revenues will be up 17-20% sequentially and GAAP EPS will increase by a minimum of 18% (this is at the lowest end of guidance, and HIMX is known to be conservative when giving quarterly guidance). After adjusting for ~$1.00 in cash per share, HIMX trades at an attractive 13x FY13E earnings which is much lower than its growth rate and in line with comparable companies like Novatek (TPE:3034) and United Microelectronics (NYSE: UMC). HIMX's PEG according to Yahoo Finance is a ridiculous 0.55x.
Oh, before I forget… did I mention that HIMX has $11.6m in share repurchase authorization available, and will be announcing its dividend sometime within the next few weeks (which shorts will have to pay)? Do I smell a short squeeze? Just kidding, the short float is only 2%, but I wouldn't be surprised if 100% of that 2% covered soon. In 1Q, management wisely did not repurchase any shares as the stock rocketed upwards. Now they have an opportunity to buy back stock opportunistically which will be extremely accretive to earnings when combined with the business's expanding gross margins.
While HIMX longs may be in for a bumpy ride in the near term, I believe the longer-term thesis still holds up for the stock: cheap valuation, aggressive earnings acceleration, and a conservative balance sheet with management returning capital to shareholders will propel the stock higher over the course of the next few months. Some things to look forward to include an expected triple (not the Gomes kind of triple) in HIMX's CMOS business in 2Q, increased penetration of the red-hot IP Cam, surveillance, and automotive camera markets, and a call option on whatever contracts HIMX has with the 'top-tier' customers it has been talking about in its last couple of earnings conference calls.
Now of course I could be completely wrong here (and I hope that I am)... but something tells me that the volume and price surges coincide a little bit too closely with speculation by certain bloggers on HIMX's debunked relationship with Google. This week will be a key test for the stock, and will give us an idea of what kind of money has bought into the company's story. Let's hope it is the smart money.