Glass or No Glass, This Stock Is Just Class (but Conditions Apply)

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The last three months have been simply outstanding for those who have their money invested in Himax Technologies (NASDAQ: HIMX) with shares gaining more than 100% since late February. I’d expected Himax to scale great heights when I covered it in February, but its meteoric rise has me rubbing my eyes in disbelief.

At that time, Himax was trading under $3, had a trailing P/E of less than 10, and an exceptional PEG ratio of just 0.53. Cut to the present, all those metrics have inflated tremendously; except the PEG ratio which has moved to 0.48.

Himax shares have been soaring ever since a Seeking Alpha article by Mark Gomes in the beginning of March suggested that the company could be a supplier for the Google (NASDAQ: GOOG) Glass. The stock has been running like a rocket ever since, driven by the euphoria around Himax due to its probable relationship with Google.

Look beyond the glass

But, there’s more to Himax than just Google Glass. Talking about a product which may or may not be successful initially, and buying shares of a company which might not draw a great deal of revenue from the novel wearable computing device is foolhardy at best. Himax’s business has already been strong without Google Glass, as I’d pointed out in February 2012 (way before rumors of a Google Glass), and it continues to be so.

Himax’s recently-reported first-quarter results reveal that it is doing well and its sunny outlook deserves more scrutiny rather than passing it off as Google Glass driven. As Fool analyst Alex Planes pointed out, Himax’s revenue and earnings improved from the year ago period and its guidance was also fantastic. Despite these positives, the stock lost its wheels for unknown reasons.

Himax’s movements are quite erratic as it has seen a few wild swings in the past three months. So, if you’re going to buy this stock, you would need to brace yourself for a bumpy ride. But, it might be worth it in the end.

The company has been improving on all fronts, be it revenue, earnings, margins, or its business. The company’s display drivers are found in a wide array of devices ranging from tablets and smartphones, to cameras, monitors, notebooks, and TVs. It’s these products that have been driving Himax’s business and they are sold in abundance, rather than something like Google Glass which isn’t sold commercially yet.

The Glass ain’t important yet, but these are

The company plies its trade in the most lucrative smartphone market in the world -- China -- where consumers are moving from older devices to entry-level smartphones. This has led to a solid growth in sales of Himax’s small and medium-sized drivers, which now account for 52% of its revenue, up from 43% last year.

In addition, these products are also being adopted by international customers and helped Himax post sequential revenue growth in the small and medium-sized driver business despite seasonality. But, the huge opportunity in China cannot be ignored as that market is set to grow in leaps and bounds and positively impact Himax.

Throw in the company’s moves to further improve its non-driver business, and Google Glass prospects would seem secondary. CMOS image sensors, touch panel controllers, power management ICs, LED drivers, etc., which are a part of the non-driver business, are also finding good traction and grew 6% from the year-ago period. Moreover, these non-driver products are leading to better margins for Himax, and the effect is there to be seen as gross margin grew to 24.6% from 22.9% last year.

Himax expects this business to grow further. Also, the company’s large panel driver business, which accounts for 34% of its revenue, is expected to get better after declining in the previous quarter. Seasonality, high customer inventory, and tepid demand for monitors led to a 16% drop in the large display driver business from last year. However, expansion of panel production capacity in China and “potential new business from Korea” (Samsung?) should help arrest some of the decline.

And as I’d mentioned above, the company sees mobile devices as a major driver of its growth. Apart from smartphones and tablets, Himax’s products are also being used in automotive displays. The company sees this as another big opportunity as it has landed design wins across the globe, which should see this business prosper.

Next, Himax also sells its drivers to Wintek, the manufacturer of touch panels for the Apple (NASDAQ: AAPL) iPhone and the iPad. Wintek had manufactured the panel for the iPad mini, and rumors suggest that it has already had a trial production for the touch panel to be used in the next iPad and it might be ramped up in the second half of the year, when Apple is expected to refresh its lineup.

Moreover, if Wintek manages to land the deal for the retina iPad mini, then Himax could see even better business from its Wintek account. The iPad mini is one of the most anticipated tablets this year and Apple might launch the device in the third quarter this year, according to NPD DisplaySearch. With the current iPad mini being a hot commodity, a bumped up, retina toting version of the device should surpass its predecessor’s sales.

Himax’s management also had a few words about their LCOS technology, which is to be used in head-mounted displays. The company is preparing for the possible ramp up of this technology and has invested in its facilities accordingly. Also, management commented that it has collaborated “with several top-tier customers on the new head-mounted display application.” Now, Google might be one of these as even the likes of Microsoft and Sony are also considering similar devices.

Be concerned, but keep an eye

Now, with Google having already released the Explorer edition of the glass, it remains to be seen how a full-fledged commercial version would look. The Explorer edition is not even as good as a smartphone from two years back, and sells for a steep price and I’m not really impressed with its limited functionality considering the price.

Thus, if Google Glass (or other head-mounted displays) doesn’t click or Himax doesn’t actually find a spot in it, then Himax shares would probably come crashing down as they have been bid up by investors to a pretty expensive trailing P/E of 21 times in anticipation. However, I would still recommend accumulating Himax shares whenever there is weakness in the stock as its overall business looks good and I won’t care too much about the Glass.

Moreover, a forward P/E of just 10 times, a very low PEG ratio, and potential for solid growth ahead make Himax a stock worth keeping an eye on. My only gripe is that shares have run up too high on the basis of something which I would call speculation, but Himax still looks like a worthy investment if we clear out the noise.

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, “Apple Will Destroy Its Greatest Product.” Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus