Is Beaten Down Himax Technologies A Buy Going Into Earnings?

| About: Himax Technologies, (HIMX)

Summary

Himax has disappointing investors in 2014 due to various reasons.

Himax will gain traction from the Chinese market as the 4K shipments are expected to soar this year.

LTE smartphone shipments are also expected to increase, which will benefit Himax in the long run.

Himax is a great buy at present valuations.

Himax Technologies (NASDAQ:HIMX) is not in good shape this year, having lost 55% of its value so far. But, with the company slated to report its second-quarter results on August 7, will it be able to mark the beginning of a turnaround? Let's check.

The estimates

Analysts, for the second quarter of 2014, expect Himax to deliver average earnings per share of $0.14 compared to $0.11 per share in the same quarter last year. The average revenue for the quarter is estimated to be $194.95 million, less than the previous year quarter's $206.96 million, which will be a 5.80% year-over-year decline. Hence, Himax's revenue is expected to take a beating, but investors can find relief in the fact that its earnings are expected to grow nevertheless.

At this point, the important question is whether Himax will be able to issue a strong outlook that will mark the beginning of a turnaround.

How the long-term looks like

Himax seems to be in a little trouble as it is not yet benefiting from the Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Glass as expected. Himax's LCOS microdisplays were to be used for Google Glass. However, since this business accounts only for about 18% of the company's total revenue, it is not going to affect the company very much, at least for now.

Google Glass' actual launch has been delayed since long as Google is planning to develop a fashionable version of the Glass and if it becomes a mainstream product, and makes a mark in the market for head-mounted displays, then Himax is definitely going to profit. This segment is also showing solid growth as it grew 45% year over year in the previous quarter.

The large panel IC segment, which is the company's strongest business segment, witnessed growth due to an increase in sales of driver ICs for TVs, thereby counterbalancing the effect of notebooks and monitor ICs. This growth is accredited to an increase in TV sales in China and the rising production of 4K TVs.

Smartphone growth

Himax's driver business also includes ICs, which are used in small and medium-sized panels for applications including smartphones, tablets, and automotive. Although smartphones have been able to drive sales, the inventory correction by the company's Korean end-customer is likely to bring down smartphone IC sales in the second quarter. Finally, for the small and medium-sized driver segment, the company expects revenue to be down for driver ICs for smartphones.

The company's Chinese market is gaining impetus, and the results are expected to show in the second half of the year as 4G LTE adoption and resolution upgrades to high definition will go mainstream. Its large display driver business is expected to gain traction, while panel shipments for 4K TVs to meet the needs of the growing consumer base will be another catalyst.

4K TV shipments will increase to 13 million units this year from just 1.9 million units last year, and China will have a 78% share of this market. Additionally, the small panel display drivers of Himax are also used in Chinese smartphones and the company can gain from the increasing adoption of LTE handsets. LTE smartphone shipments are estimated to increase an impressive 547% in China to 135 million units this year.

Non-driver will lead to long-term growth

The company's LCOS business is doing well, and remains the company's long-term growth driver. Himax leads with its LCOS microdisplays in the market. The company is working on various new designs with top companies, including some custom-built designs from customers' development fees. Additionally, the company also is working with some top-tier customers on head-mounted technology product development.

The company's non-driver business is what drives good growth and prevents competition. Himax has expertise in image processing and human interface related technologies, along with various other non-driver products such as CMOS image sensors, touch panel controllers, power management ICs, and ASIC services which can produce good results in the next quarter, registering double digit growth.

Conclusion

Himax's demonstrates a highly attractive valuation along with a cash dividend of $0.27 per American depository share. Also, the company expects its earnings to grow at an annual rate of 40% for the next five years. The company runs at a very low debt-to-equity ratio of 0.23, which stands below the industry average and signifies its successful management of debt levels. All in all, the company is worth looking at for investors going into earnings.

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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