Is Himax Technologies A Value Play Or A Value Trap?

| About: Himax Technologies, (HIMX)


Himax Technologies shares are down more than 50% in 2014, on the back of several analyst downgrades and slow growth.

There are rumors that Google might not be using Himax microdisplays for its Google Glass product.

But Himax sees some strength in TV sales, and an attractive valuation also works in the company's favor. However, investors should exercise caution.

Himax Technologies (NASDAQ:HIMX) is having a terrible time in 2014. The stock has dropped more than 54% so far, and it looks like things are about to get worse. A number of analysts are downgrading Himax, as the company still hasn't benefited from the elusive Google (GOOG GOOGL) Glass. There have been concerns that Himax might not profit from Glass as expected, with rumors suggesting that Google is breaking away from the company. Google was supposed to use Himax's LCOS microdisplays for Glass, and even invested in the company. So, a rumor like this is weighing heavily on Himax shares.

Ominous signs

Late last month, Himax shares dropped more than 14% in a single day on the Google-Himax break-up rumor. According to TheStreet:

"Himax Technologies plummeted today on whispers that the company is losing a main client.

Investors reacted to unconfirmed reports that Google will no longer use Himax's display chips in its Google Glass wearable computer. Shares of the semiconductor design company fell more than 14% intraday as investors debated whether to sell on the questionable news."

This rumor found more credibility when Craig Hallum downgraded the stock to a "hold," citing Google is taking a different approach to making Glass. In addition, UBS recently cut the stock's rating to "sell" from "neutral," saying that the company's core business of making display drivers for televisions will take a hit, owing to weak demand in China.

In addition, although the company has built up its LCOS microdisplay capacity, it looks likely that it won't be of much help. According to Chardan Capital Markets:

"We had slashed our 2014 estimate for LCOS shipments from the original estimate of 15 million units to 8 million and more recently down to 5 million units. It appears that even 5 million could be aggressive for this year."

So, all in all, things are looking bad for Himax. It experienced a major slowdown in its large panel display drivers business in the first quarter, which slumped 19.2% year-over-year to $48.6 million. In fact, the large panel display driver business accounted for 25% of its total revenue in the first quarter, down from 34.2% last year.

In such circumstances, what should investors do? Buy more of Himax due to its attractive valuation, or stay away from it, as it looks like a falling knife? Let's try and find out.

Positives sprinkled with negatives

Himax is still positive regarding its business and growth. Its display driver products are expected to find traction on the back of 4G LTE adoption and resolution upgrades to high-definition. Also, Himax has started panel shipments for 4K TVs for new and existing clients across the world.

Also, despite an inventory correction by one of its major Korean customers that could offset its sales in IC drivers for smartphone and tablets, Himax expects strong demand in China on the back of 4K TV demand. In fact, this is one area where Himax could see some growth, as sales of 4K TVs are expected to hit 12.7 million units this year, up from just 1.9 million units last year, according to NPD. So, this is an area where Himax could expect some respite.

However, the fact remains that 4K TV adoption is expected to gain steam because of a fall in prices. As reported on Tom's Guide:

"Commercially available 4K/Ultra HD TVs are currently very expensive - Sony's 55-inch Ultra-HD screen costs $4,999.99. However, NPD says that the price is projected to drop rapidly while the amount of content increases. The average price of a 4K TV will drop to about $2,000 in North America in 2014, and will fall to as low as the equivalent of $1,000 in China, according to NDP, which didn't specify screen size for these price estimates."

As a result, a drop in the price of the TVs could also lead to a drop in price of panel drivers, as manufacturers would try to maintain their margins. As such, Himax's profit could take a hit, even though volume shipments of panels could rise.

Unsure Google Glass prospects

As far as Google Glass is concerned, it remains to be seen how customer adoption of the device will turn out to be. As reported by Business Insider earlier this year, Google Glass is not being accepted well in many public places. Business Insider reports:

"If you happen to be in San Francisco and want to enjoy a frosty beverage or grab a bite in a Glass-free zone, you won't be left out in the cold.

Daen de Leon, a software engineer at a genetic testing company who lives in San Francisco, has compiled a list of places that ban Google Glass. And the list is growing.

Right now there are 13 bars and restaurants in San Francisco that have a "no Glass" policy. There are also a handful in Seattle and Oakland, Calif.

The places range from casual bars, such as Zeitgeist in the Mission (that also has really great burgers), to the more upscale, such as Italian restaurant Acquerello."

Now Glass is still in its pilot phase. If people aren't allowed to use the device in public places, then its adoption might take a hit. So, Himax investors shouldn't count much on Google Glass right now to boost sales.

Value play or value trap?

All said, there's no doubt that Himax's valuation is attractive. The stock trades at a trailing P/E of just 17.6, while the forward P/E comes down to an even more reasonable 11.75. In addition, its PEG ratio of just 0.36 suggests undervaluation. Its revenue and earnings growth in the previous quarter was also decent, at 11% and 12%, respectively. Moreover, Himax's earnings are expected to grow at an annual rate of 40% for the next five years. So, investors might be tempted to buy Himax on the weakness.

However, if Google is indeed breaking away from Himax, as a couple of reports suggest, and the company's TV shipments come in weak, then Himax might fall further and look like a value trap. As such, investors should exercise extreme caution while investing in Himax.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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