Himax Technologies: The Short Case

| About: Himax Technologies, (HIMX)
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Himax Technologies (NASDAQ:HIMX) has had a great run-up. In the past two months, HIMX's stock price has increased by over 110% from $2.87 on 2/8/2013 to $6.20 today.

Because of the almost parabolic run-up, the company now boasts a $1.05 billion market cap, an enterprise value of $1.01 billion and an EV/EBIDTA of 12.5.

HIMX's stock started ticking up meaningfully on March 4th when Seeking Alpha contributor Mark Gomes speculated that HIMX would be the LCOS panel supplier for Google Glass. HIMX stock has since added 470 million in market cap and gone parabolic.

The question on every investor's mind is: do the fundamentals support the run-up?

What we know:

1) HIMX has not stated that it has the Google Glass contract.

2) There are other companies with equivalent or better tech in the LCOS panel field such as Epson and Kopin.

3) Karl Guttag, an industry expert, doubts that Google will use HIMX LCOS for production.

To my understanding Himax pretty well failed with color sequential LCOS. They had an analog design (Syndiant was/is digital) that didn't work very well. If they are working on transmissive, it is a big secret and I doubt they would be competitive with companies like Kopin and Epson that have well of a decade of production. It is a whole different way of making the devices and could cost well over $100M to set up the factory and likely world would have leaked out). It is not impossible, but IMO very unlikely.

The color filter LCOS was a tough business because it was a low resolution device with lower color quality and had to have low selling price.

4) HIMX operates in an extremely competitive and highly cyclical flat panel display semiconductor industry. Its EPS fell from $0.57 in 2007 to $0.09 in 2011 and has only recovered to $0.30 in 2012. Approximately $0.16 of that 2007 peak EPS was due to an R&D tax break that has since been discontinued.

5) There does not appear to be strong tailwind in HIMX's main business. The current management guidance for first quarter 2013 is about the same as first quarter 2012. The best case YoY comp is a paltry +14%.

Based on information available to the Company as of February 7, 2013, Himax is projecting the following for the three months ending March 31, 2013

Net Revenues: To decline by high-single-digit to low-teens in percentage, as compared to the fourth quarter of 2012
Gross Margin: To be slightly up from the fourth quarter of 2012
GAAP EPS: 6.5 to 7.5 cents per diluted ADS, as compared to 6.6 cents of the same period 2012
Non GAAP EPS (1): 7.0 to 8.0 cents per diluted ADS, as compared to 7.1 cents of the same period 2012

6) This might be speculation on my part, but Google Glass itself is unlikely to be a big hit due to customer unfamiliarity, privacy concerns, and relative expense due to lack of telecom subsidies. The relative expense may deter programmers and app development, giving consumers less reasons to buy.

7) The valuation for HIMX compared to its peers or historical EV/EBIDTA is egregious.

  • The EV/EBIDTA for MagnaChip (NYSE:MX) is 4.3.
  • The EV/EBIDTA for Intel (NASDAQ:INTC) is 4.6. (Intel doesn't compete directly against HIMX but it is in the same sector)
  • The historical EV/EBIDTA for HIMX is 4 to 7.

With an EV/EBIDTA ratio 12.5, HIMX is anywhere from 80% to 200% overpriced.

The Google Glass Math

Because other companies have competitive advantages over HIMX in the LCOS panel field, the most likely outcome is that HIMX does not get the Google Glass contract. However, if HIMX does get the Google Glass contract, reasonable assumptions for incremental EBIDTA would be for 15% operating margins and $10 revenue for every unit of Google Glass sold.

With those assumptions, we get $1.5 million in incremental EBIDTA for every million unit of Google Glass.

(1 million units * 0.15 operating margin * $10 revenue/unit)

This gets us the following table: (HIMX has a EV of $1 billion and a TTM EBIDTA of $80 million)

# of Google Glass Sold (in millions) EBIDTA EV/EBIDTA Ratio
0 $80 million 12.5
1 $81.5 million 12.25
2 $83 million 12
5 $87.5 million 11.4
50 $155 million 6.45

Google will have to sell over 50 million Google Glass units per year for HIMX to meet the high end of its historical TEV/EBIDTA range of between 4 and 7. In comparison, Apple only sold 56 million iPads in 2012.

Other Concerns:

Customer concentration

One company, Chimei Innolux, accounts for 31.8% of revenues and owns 15% of the HIMX. The close relationship with Chimei Innolux puts HIMX at a disadvantage when bidding for contracts from Chimei Innolux's competitors. Part of the reason why Himax's revenue dropped in 2009 and 2010 was because Chimei bought several of Himax's customers and decided to diversify away. (in '09, Chimei accounted for 69% of revenues)

The same scenario could happen again and would be a big tailwind.

Not world class management:

The CFO Jackie Chang was the former CFO of Tongxin International (OTCPK:TXIC) - a company that lost the majority of its value since its IPO.

No more tax breaks

HIMX's 2004 to 2009 net income is misleading because of a R&D tax break that allowed the company to deduct half of its R&D expenses. That tax break has been discontinued.

History usually repeats

Stocks that go parabolic rarely continue their trajectory. Most revert in an ugly fashion. Some recent examples are SLV and GMCR in 2011 and AAPL in 2012.


HIMX has had a great run-up but the run-up is based on hype and not fundamentals. Based on reasonable assumptions, HIMX would need to sell over 50 million Google Glass LCOS units per year to justify the high end of its historical EV/EBIDTA. In my opinion, HIMX should be priced in line with its peers and historical EV/EBIDTA at $3-$4 per share and is a strong sell.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in HIMX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.