On Monday morning, Himax (HIMX) announced that Google (GOOG) will invest in Himax Display, a subsidiary of HIMX. The deal is explicitly intended to fund LCOS microdisplay production capacity at HIMX. Under the terms of the deal, Google will hold a 6.3% of HDI and have the option to more than double it to 14.8%.
With this news, HIMX's role in Glass appears to be locked and loaded. In addition, it signifies that Google intends to prepare for significant levels of annual Glass production. In an earlier report, we discussed our belief that HIMX would raise its LCOS capacity from 2 million to 7 million.
However, this afternoon's round of checks, including a discussion with Himax, confirmed that the company's most recent LCOS capacity is on the order of 300,000 units per month (3.6 million units per year). More importantly, these same checks lead us to believe that management is currently seeking to expand that capacity to 2 million units per month (24 million per year). To be clear, there are no indications as to when this goal would be achieved, so we would err on the side of conservatism. However, these are the figures we have obtained and they are obviously bullish for HIMX's opportunity in the LCOS market.
Even if it takes 3 years to fully ramp, we believe 24 million units would represent $250-450 million of incremental revenue for HIMX over that time frame. We estimate the operating profits on this revenue stream would be in the $100 million range, dropping about $0.50 of additional EPS to the bottom line. These are intentionally round numbers, as nobody can accurately forecast exactly what these numbers will be. That being said, these rough estimates get us into the right ballpark and illustrate that HIMX's EPS have a clear path to doubling in a reasonable time frame.
This should firmly establish HIMX as a growth company. Wall Street estimates currently call for 25% top line growth and 40% bottom line growth next year. Based on the figures we are working with, we believe that multiple years of 25% EPS growth should serve as a base case scenario. Assigning a PEG ratio of 1 is more than enough to justify our original assertion that shares of HIMX are poised to triple (from the time of our original article).
Investors should note that HIMX has a history of choppy earnings. However, they should also note that this is par for the course in this industry. The important thing is not where they were in Q1 or where they are going in Q2 (or even Q3). The focus should be on the ramping LCOS business, which will serve to alleviate any lumpiness over time and ensure that the overall trajectory is up and to the right. In other words, we now feel comfortable enough with our longer-term HIMX projections to justify a reclassification of the shares to "Gold Mine".
Implications for other PoisedToTriple portfolio selections
We believe that the Google/Himax deal can be instructive as it pertains to a few of our other recent stock selections.
We first highlighted Pixelworks (PXLW) last month in a SeekingAlpha article. Since that time, we have observed the continuation of a trend whereby Google, Apple (AAPL), and others have pulled away from its dealings with Samsung (GM:SSNLF). Most recently, Samsung was rumored to replace HIMX in Glass. We refuted those claims and now feel vindicated in this regard. More importantly, it opens up significant opportunities for smaller Samsung competitors to win market share and take part in the mobile operating system revolution.
For PXLW, this deal should increase speculation that a strategic partner could surface to gain access to the company's image processing technology and patents. These assets should be of interest to any of the large vendors that are lacking image processing expertise but wish to compete in the Internet TV market. Basically, we are referring to non-TV manufacturers, like Google and Apple.
Anyone who has seen the picture on new UltraTVs [from companies like Sony (SNE) and LG] knows how much of quantum leap these TVs are making versus traditional HD. Sony and LG have a long history in image processing. If Google and Apple wish to close the gap, they will need to partner or acquire in our opinion. Based on our research, PXLW represents the best candidate among independent image processing technology vendors.
The GOOG/HIMX deal also serves to illustrate how important it is for vendors to lock down their manufacturing supply chains. Google can't afford to have any manufacturing disruptions on Glass. Its investment in HIMX ensures that it will have first priority in HIMX's LCOS production. It also ensures that HIMX will expand its capacity to meet GOOG's needs.
We can envision a similar arrangement unfolding between privately-held Mevion Medical Systems and TechPrecision (TPSC), which has also been highlighted on SeekingAlpha. Mevion was the second most-highly funded private Healthcare company during the second quarter. Its S-250 Proton Therapy System provides a revolutionary cost advantage over current solutions. The system is in its final stage of testing and was given $55 million to move forward with production and marketing activities in anticipation of the coming demand. Indeed, over $100 million worth of units are already on order.
To deliver the S250, Mevion awarded a 5-year, $115 million contract to TechPrecision to be its exclusive manufacturing partner. This added to the company's impressive list of opportunities, which we have previously articulated on SeekingAlpha. We believe it would behoove Mevion to follow GOOG's lead and provide financing to further ensure the future expansion of its S-250 business.
The Bottom Line: Lessons notwithstanding, investors should understand that we are in the midst of a generational evolution in the mobile and computing market. As these markets converge, globalization will reach levels once thought unimaginable. The long-term implications are obvious for the winning vendors. Accordingly, investors should maintain a long-term view in order to maximize their gains.