The market is still undecided over what direction it wants to take. Big swings up and down are still seen every week, what gives opportunities for long term investors. I’ve increased my position this week in Alphabet and MGM Resorts, taken advantage of unreasonable stock price drops. My portfolio is down a lot, but my companies are still performing well. Fundamentally nothing has changed so I have been buying my companies at a cheaper price.
Today, I will do an updated analysis on the company: Himax Technologies $HIMX. The stock has been dropping lately together with the rest of the market. Not many stocks are getting spared from the current sell off. I’ve first bought Himax around November and wanted to start building out a position. At that time the stock caught a lot of momentum and kept going higher till a point where I saw no more reason to hold my position. Since the profits that companies can earn are finite, the price that investors should be willing to pay for stocks must also be finite. Since December the stock came back down to a normal valuation, and I’ve yet again started building out a position.
- Top 10 global IC design company
Himax climbed this year into the global top 10 Integrated Circuit Design companies based on revenue, with a revenue increase that outpaced the others on the list. If you were doubtful Himax is a quality company, now is the time you should reassess.
- Dividend announcement
Recently Himax gained a pretty big tailwind, which could lead to another short-term stock price increase. On the 12th of May, Himax announced they will pay a cash dividend of $1.25 per share. This is equivalent to a 13% dividend yield at the current market price. The dividend will be payable on the 12th of July to all shareholders of record as of the 30th of June. This is a nice reward for shareholders to get this amount of value.
But there is more, this dividend can cause a big rally towards the ex-dividend date. Investors that are currently shorting Himax with borrowed shares, are not entitled to the dividends. Short sellers owe any dividend payments to the shares ‘lenders. Currently there is 18% short interest on Himax. To cover all the short positions, it would take almost 12 days. The probability of shorts covering is very likely and it could be started already. Expect to see some positive momentum in the next weeks.
- Q1 results and Q2 guidance
The last quarterly results declined sequentially but increased enormously year over year. Revenue grew 33% and net income grew around 73%. Given the fact that the Q1 results are always weaker than Q4, we can conclude this was a pretty good quarter. Unfortunately, the Covid lockdowns in China impacted the supply chain and consumer electronics demand. In response, panel makers are reducing their IC inventories, causing softening in demand for Himax in Q2. Himax expects Q2 sales to be the low point of this year, but they remain upbeat about their top line for 2022 due to clear visibility in the automotive business and two new revenue streams including AMOLED drivers and ultralow power AI sensing.
- Balance Sheet
After an amazing year, Himax’s balance sheet has grown very healthy. The company has a lot of cash on hand and can pay all their short-term bills. The year over year increase of inventory is not unreasonable. Since customers were chasing Himax for chips last year, leaving no finished goods in the inventory.
Looking at the valuation of Himax, you can see it is currently pretty cheap. The company is trading at only 3x earnings, 1x sales, 1.6x book value and 4x free cash flow. Compared to the sector median the valuation looks silly. Himax does not seem to be respected yet as a quality semiconductor company and will need to prove themselves once the chip shortage fades away.
- The risks
There are currently two risks for Himax’s business. One is a decrease in margins and second one is a slowdown in innovation and falling behind against the competition.
Gross margins have been going up last year due to the chip shortage. A lot of investors fear the margins will normalize soon, which will lead to a decrease in profits for Himax. But it is also important to see that Himax’s products mix is heavily changing each quarter. Himax has gained 40% global market share in driver IC for automotive displays, Himax expects e-paper display sales to increase 300% year over year and if that was not yet enough Himax is also gaining momentum in AMOLED drivers and AI image sensing. All of these benefit from higher gross margins and will keep the overall gross margins higher even if other parts of the business get a normalization.
Another impressive move by the management team has been the decrease of the dividend pay out ratio. They acknowledge the macroeconomic uncertainty and want to deliver sustainable long-term growth. I hope they will keep their payout ratio lower than 50% for the next years so they can keep up with competitors. Although, I would’ve liked to see some more buybacks at the current valuation.
- My approach
Since the stock has been dropping, I have been able to build out a decent position in the company. If the stock stays at these levels, it is almost a no brainer with the yearly dividend of 13%. Earnings for 2022 are forecasted to be similar to this year’s earnings. This means you can expect another 13% dividend next year if the payout ratio stays the same. Himax has a good position to keep gross margins higher for now. Even a drop in gross margins should not really matter at these low valuations.
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DISCLAIMER: I do own shares of Himax Technologies. I am not a financial advisor. Investing is your own responsibility. I am not accountable for any of your losses.