Himax Already Saw Its Top

| About: Himax Technologies, (HIMX)
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Summary

Himax's inventories are worrisome.

There's a lack of demand for Himax products.

Dividend is absolutely unsustainable.

Himax Technologies (NASDAQ: HIMX) is a semiconductor solution provider dedicated to display imaging processing technology. Since 2016, the company has largely underperformed the S&P 500 (NYSE: SPY), the Russell 2000 Index (NYSE: IWM) and the Semiconductor Index - Philadelphia ($SOX). During the first half of 2016, the highly volatile HIMX appreciated by 40% when its price per share traded at $11.80. Since then, the stock fell by more than 50%. It currently exchanges hands at $5.80 per share.

From the technical perspective, you could argue that the stock is at multi-year support levels. However, the research I want to present you indicates that HIMX could be in trouble, and any bounce from current levels will not be significant.

Inventories are the key

Cutting to the chase, let us look at some trends. I decided to look at inventory levels in search for clues about the future of HIMX. Inventories are a good indicator of future performance because you can identify trouble in sales, inventory management, and potential unforeseen losses. Delving into the last five annual financial statements (20-Fs), I extracted the following data.

Unadjusted

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Dec. 31, 2012

Dec. 31, 2011

Dec. 31, 2010

Revenue

$ 691,789

$ 840,542

$ 770,739

$ 737,255

$ 633,021

$ 642,692

Cost of revenue

$ 528,651

$ 634,660

$ 578,886

$ 566,700

$ 507,449

$ 507,647

Inventories

$ 171,374

$ 166,105

$ 177,399

$ 116,671

$ 112,985

$ 117,988

Using this information, the first metric that I calculated was revenue growth. If sales growth is increasing faster than inventories growth, there may be an issue with inventory management. If inventory growth is increasing faster than sales growth, it may signal a lack of demand for the company's products. Ideally, you want to see sales growth and inventories growth increasing at the same pace.

HIMX's inventory management is strange, to say the least. Sales decreased by 17% from 2014 to 2015. Nonetheless, inventories increased by 3% over the same period. We can observe the opposite effect happening between 2013 and 2014. Oddly, sales grew by 4% in 2013 on a YOY basis, but inventories soared by 52%. I'm unsure why management decided to boost its production if there was no sign of increasing demand for its products. We also have to keep in mind that higher inventories translate to higher storage and insurance expenses.

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Dec. 31, 2012

Dec. 31, 2011

Growth Revenue YOY

-17.70%

9.06%

4.54%

16.47%

-1.50%

Growth Inventories

3.17%

-6.37%

52.05%

3.26%

-4.24%

Let us look at the efficiency of inventory management. The inventory turnover and the days on inventory at hand ratios provide clues about how the company manages inventory. We calculate inventory turnover by dividing the costs of goods sold over the average inventories. We will revisit this formula later. In principle, the higher the inventory turnover, the more inventory the company sales in the period. Unfortunately, HIMX's inventory turnover ratio has been declining since 2012. Therefore, you will want to see the exact opposite trend.

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Dec. 31, 2012

Dec. 31, 2011

Inventory Turnover

3.13

3.70

3.94

4.94

4.39

Days Inventory on Hand

117

99

93

74

83

When inventory becomes obsolete, the company is obligated to write it down or write it off regardless of the accounting principle. The write-down expense is added to the cost of goods sold and inventories decrease by the same amount. Therefore, a write-down or write-off will improve the inventory turnover by increasing the cost of goods sold and shrinking the average inventories. Therefore, the company may look like it is more efficient than it is.

In search for more clues about HIMX's performance, I decided to delve into the inventory turnover pre-write-off to remove the inflationary effect of the write-offs. To do this, I subtracted the write-off amount to the cost of goods sold for each year. Simultaneously, I added the write-off amount to the inventories.

Adjusted

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Dec. 31, 2012

Dec. 31, 2011

Dec. 31, 2010

Revenue

$ 691,789

$ 840,542

$ 770,739

$ 737,255

$ 633,021

$ 642,692

Cost of revenues

$ 528,651

$ 634,660

$ 578,886

$ 566,700

$ 507,449

$ 507,647

Inventories

$ 171,374

$ 166,105

$ 177,399

$ 116,671

$ 112,985

$ 117,988

Inventories write downs

$ 9,785

$ 8,198

$10,759

$12,418

$9,138

$ 10,557

Adj. COGS

$ 518,866

$ 626,462

$ 568,127

$ 554,282

$ 498,311

$ 497,090

Adj. End Inv.

$ 181,159

$ 174,303

$ 188,158

$ 129,089

$ 122,123

$ 128,545

Adj. Inventory Turnover

2.92

3.46

3.58

4.41

3.98

Days Inventory on Hand

125

106

102

83

92

It is evident that the inventory turnover ratio is much worse than what the financial statements indicate. As long as sales do not improve, and the inventory turnover degrades, you can be confident that the demand for HIMX's products is low. Therefore, if you believe that the trend is your friend, you should not consider buying HIMX until these important metrics reverse.

Are you concerned about the dividend? Me too.

Lastly, I would like you to be aware of the dividend payment. Last year, HIMX offered $0.13 per share, representing a 2.5% dividend yield. HIMX has been disbursing these dividends once every summer over the last six years. If HIMX wants to have a chance at survival, it must cancel its dividend distribution now. Looking at the statements of cash flows, HIMX did not make enough cash from operations to cover the dividend distribution. From 2011 to 2014, the company's dividend coverage ratio was above one mainly due to high net income. As long as net income does not improve, the dividend distribution must stop at all costs.

Looking at the dividend coverage from the EPS perspective, things look much worse. The company has not made enough to cover the dividend payment over the last five years. Evidently, HIMX is walking on a unsustainable path.

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Dec. 31, 2012

Dec. 31, 2011

Net cash provided by operating activities

$ 22,529

$ 93,719

$ 51,123

$ 52,167

$ 43,448

Payments of cash dividends

$ (51,364)

$ (46,042)

$ (42,394)

$ (10,680)

$ (21,224)

CFO/Dividends Paid

0.44

2.04

1.21

4.88

2.05

EPS

$ 0.07

$ 0.19

$0.18

$0.15

$0.03

Dividend per share

$ 0.15

$ 0.39

$0.36

$0.30

$0.06

EPS/Div

0.47

0.49

0.50

0.50

0.50

My two cents

You may be thinking about investing in HIMX as a gamble. However, you must remember that your money was hard earned. Therefore, you need to treasure it. Presently, HIMX is not a viable investment vehicle, and you should avoid it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.