Why Now Is A Good Time To Buy A Beaten Down Himax Technologies

| About: Himax Technologies, (HIMX)


Himax Technologies is slowly and steadily turning around after a woeful time in 2014.

Himax will benefit from the growing adoption of 4K TVs and increasing sales of smartphones where its display drivers are used.

Himax is attractively valued considering that its earnings are expected to grow at an impressive rate going forward.

It has been a woeful year for Himax Technologies (NASDAQ:HIMX), the company expected to benefit by supplying sensors to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for the Glass wearable device. After delivering a terrific performance in 2013, Himax shares have declined around 45% this year. However, it looks like a turnaround is in the cards, and Himax's second quarter results point in the same direction.

Himax beat estimates for the second quarter. Although its revenue of $196.4 million was down 5.1% from the year-ago quarter, it was better than consensus estimates. In addition, Himax reported non-GAAP net income of $24.5 million, a jump of 21.9% year-over-year. Looking ahead, Himax's performance looks set to improve as the company's guidance for the current quarter indicates a year-over-year rise of 12%-17%, which is a remarkable improvement from the last quarter's revenue decline.

Why Himax can improve

Himax is riding on several trends. The company's non-driver business is doing well due to the adoption of programmable gamma OP, power management ICs, touch panel controllers, timing controllers and CMOS image sensors. Moreover, the non-driver business category is projected to grow by about 20% sequentially during the third quarter. More importantly, Himax management expects the momentum to continue into 2015 as well.

Himax is witnessing growth in all of its product segments, including small and medium driver ICs, large panel driver ICs, and non-driver ICs. One of the reasons behind the company's growth is strong demand from its Korean end customer.

Looking closely, driver ICs for TVs, under the company's large panel driver IC business, are driving growth. The primary reasons behind the solid growth in the large panel driver IC segment is rapid growth from the Korean and Taiwanese customers, solid sequential demand from Innolux, fast expanding capacity for Chinese TV panel customers, and greater 4K TV displays being produced at almost each of the large panel customers.

Moreover, 4K TV penetration and acceptance is expected to grow at a healthy rate going forward. Shipments of driver ICs for 4K TVs is estimated to expand during the third quarter and beyond. What's worth noting is that this growth trend is expected to persist into 2015.

According to 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."

Hence, a decline in prices of 4K TVs will spur adoption and improve Himax's end-market opportunity. In addition, as I mentioned in a previous article, "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." Consequently, it is not surprising to see why Himax is expecting gains in the TV segment going forward, and its revenue guidance also indicates the same.

Another reason behind the growth in this segment is Himax's focus on driving innovation in a highly competitive and mature large panel market. Its focus on innovation will allow it to develop new technologies and strengthen its customer base.

Some more catalysts

Beyond large panels, ICs employed in small and medium-sized panels such as tablets, smartphones and automotive applications will act as further tailwinds for Himax. In addition, sales of smartphones are expected to increase going forward due to better demand from Himax's Korean customer.

Himax is witnessing solid growth in the Chinese smartphone market, particularly in the high-end segment. Recently, it introduced a new generation of driver ICs for HD720 resolution, which is a key market for higher end smartphones. Management claims that the company has landed several design wins in China and other main markets as well.

This is yet another positive for Himax as the Chinese smartphone market is expected to grow at an aggressive pace, primarily driven by the roll out of LTE. As reported by Phonearena.com:

"According to iSuppli, the number of 4G phones shipped to China is expected to soar from 4.6 million units in 2013 to 72.6 million this year, 144 million in 2015, 220 million in 2016, and 300 million in 2017. China Mobile is a lot more optimistic. The operator expects shipments of 4G handsets in the country to reach 200 million this year. Industry watchers expect 100 million of China Mobile's 900 million subscribers to switch to a 4G plan in 2014."

New products will drive growth

As such, Himax is doing the right thing by tapping growth markets, and it is launching new products to tap the same. Himax expects its 8 megapixel sensors to begin volume shipments from the third quarter. The mass production of these 8 megapixel sensor products are expected to deliver healthy sales growth and an improved gross margin. Moreover, the company recently launched its first 13 megapixel sensor, positioning itself to deliver high-end offerings to prospective customers.

In addition, Himax Technologies and Lumus have penned a contract to develop next-generation smart glasses, delivering new technological standards in image quality and performance. Hence, the company is diversifying its wearable opportunity beyond Google Glass. This is a smart move from Himax as Google Glass hasn't hit the mass market yet, and it is important for the company to diversify its customer base.

Impressive valuation

Himax's valuation is impressive. It has a trailing P/E ratio of 21.06 and a forward P/E ratio of 14.90. This indicates that the company's earnings are expected to continue growing in the future. Its PEG ratio of 0.71 is another indicator of undervaluation. Moreover, the company is expected to sustain its impressive earnings growth rate in the long run, as evidenced by the projected annual earnings growth rate of almost 24% for the next five years.

Hence, with a turnaround in sight and an impressive valuation to show for, Himax looks like a good bet after its massive drop this year. The company's prospects are improving, and investors would do well to capitalize on the stock's dip to add more shares to their portfolio.

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.