Thanks to its improving fundamentals, cheap valuation and sector tailwinds, I think Himax Technologies, Inc. (NASDAQ:HIM) the stock is well placed to rebound in the months to come.
Founded in 2021, Himax Technologies, Inc. is a Taiwanese company semiconductor company specializing in display imaging processing technologies. It produces display driver integrated circuits, timing controllers, touch sensor controllers and other components for various electronic devices. The Company’s products are used in applications such as televisions, laptops, mobile phones, automotive displays and augmented reality devices. Himax also provides image sensors and optics for 3D and IoT sensing devices.
The behavior of HIMX stock was an indicator of the company’s revenue development and reflected demand over a certain period. In other words, before earnings peaked in 2022, HIMX’s stock price had increased almost sixfold in less than two years. But then the The company began to experience a serious contraction in margins due to inventory headwinds, which ultimately reduced operational performance significantly, and the downward movement in the stock price reflected this. advance :
However, analyzing the latest data clearly shows me that the poor HIMX stock price performance is likely coming to an end and the stock is expected to continue to recover in the new year.
In Q3 FY2023 Update For Himax Technologies, the company announced that its third quarter revenue and profit exceeded forecasts. Revenue was $238.5 million, an increase of 1.5% sequentially and an increase of 11.6% year-over-year. Gross margin stood at 31.4%, higher than the previous quarter, driven by the absence of one-off expenses and a favorable product mix, particularly in the automotive product range. The automotive activity remains the main contributor to turnover, representing nearly 45% of total sales. Due to higher margins, Himax’s diluted per share figure of $0.06 turned out to be above the guided range of 0.015 to 0.06 cents per share.
Himax’s large-screen display driver segment saw revenue decline. In contrast, the small and mid-sized display driver segment saw an increase, driven by strong performance in the automotive sector and TDDI products. Non-driver sales exceeded forecasts, primarily due to increased shipments of WLO and CMOS image sensors.
Operating profit was $11.1 million and after-tax profit was $11.2 million, or 6.4 cents per diluted ADS. Himax reported $155.4 million in cash and other financial assets as of September 30, 2023. The company noted ongoing measures to reduce costs and exercise tight budgetary control amid macroeconomic challenges. To be fair, I should point out at this point that the amount of cash on the balance sheet has been declining for several consecutive quarters, while debt continues to grow, pushing up the leverage ratio. But as you can see in the chart below, the most recently reported D/E ratio doesn’t appear extremely high. If the company gets a growth catalyst in the form of strong end-market demand or otherwise, management’s words will most likely come true.
Looking ahead to the fourth quarter of 2023, Himax management anticipates a decline in revenue of 5.0% to 11.0% sequentially, with a gross margin of ~30%. Profit attributable to shareholders is estimated between 9.0 and 13.0 cents per fully diluted ADS. The company highlighted challenges related to end market demand and prudent inventory management affecting sales growth in the fourth quarter. Despite this, the long-term outlook for the automotive sector remains positive, particularly for TDDI and Local Dimming Tcon.
However, from questions asked by Donnie Teng (the only analyst present from Nomura Securities), we learned that Himax’s average selling prices (ASP) are stabilizing. Nonetheless, pricing pressure could persist due to macroeconomic conditions and customer profitability concerns. He also discussed the strategic alliance with Nexchip and highlighted that the focus is on the automotive display sector. I believe it will be easier for the company to control its margins in the future, leading to higher profits and therefore a higher dividend payout when demand in end markets recovers.
And when I talk about dividends, it’s not just nice words about the possible future. Historically, HIMX does not skimp on dividends when the industry is doing well. Being a cyclical business, one should not limit oneself to TTM figures to predict dividends. In the case of Himax, the TTM dividend yield is 7.8%, which is already good. However, if we look at the dividend yield for next year (based on consensus), the picture becomes much more interesting: the 7.8% yield rises to almost 14%which makes HIMX shares extremely cheap for medium term holding (1 to 3 years):
At the start of the year, management expected the second half to be stronger than the first, and judging by the sales and earnings surprises in the third quarter, that’s exactly what happened. pass. The company terminated very expensive foundry capacity agreements, incurred one-time early termination expenses impacting second quarter gross margins, which stood at 21.73% at the time. Inventory reduction continued in the third quarter and gross margin stood at 31.37% QoQ.
If current operating trends continue, I expect HIMX’s dividend yield to fall by around 14% due to valuation adjustments – if the cycle reverses, the market will not ignore it. Additionally, if we look at classic valuation metrics like P/E or EV/EBITDA, we see that HIMX is trading at a relatively cheap price compared to the projected EPS growth we are seeing today. So from what I can see, there is room for this adjustment.
That’s why it’s worth buying companies like Himax before the cycle reverses. That is, before the market begins to reassess its prospects for falling yields.
Risks to consider
The semiconductor industry’s rapid technological evolution and cyclical demand expose HIMX to industry dynamics and consumer preferences, impacting its financial performance.
Customer concentration poses a risk because a significant portion of revenue relies on a few key customers, subjecting the company to its financial health.
In 2022, Client A and its affiliates represented 32.3% of our revenue. Our two largest customers together represented more than 40% of our revenue in 2022.
Source: HIMX FY2022 Report
Supply chain disruptions, technological innovation challenges, currency fluctuations and geopolitical events, such as trade tensions, pose additional threats.
Regulatory changes, macroeconomic fluctuations affecting consumer spending, and execution risks related to strategy implementation and product launches also contribute to the risk profile.
The company’s financial health, including increasing debt levels and liquidity constraints, as well as stock market volatility, further highlights the need for investors to conduct thorough research and consider these multifaceted risks in their investment decisions.
Despite relatively negative financial results in recent quarters compared to the recent past, I believe the company’s business is showing clear signs of recovery. Margins are improving, inventories are decreasing, which is a good thing. End markets are also expected to show stronger growth shortly, and the company’s focus on the automotive industry and its significant presence in this sector should help HIMX continue its recovery.
The company’s low valuation looks attractive for a medium-term investment, as does the 14% dividend yield for next year.
Based on the above and despite the risk factors, I recommend investors consider purchasing HIMX stock.
Good luck with your investments!