What a time it’s been for Himax. In the past six months alone, the company’s stock price has increased by a massive 46.4%, reaching $13.28 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Himax, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Himax Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid HIMX, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Himax’s demand was weak over the last five years as its sales fell at a 7% annual rate. This wasn’t a great result and signals it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Himax’s margin dropped by 16.3 percentage points over the last five years. This along with its unexciting margin puts the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. Himax’s free cash flow margin for the trailing 12 months was 3.3%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Himax’s $587.7 million of debt exceeds the $275.4 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $50.35 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Himax could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Himax can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of Himax, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 16.4× forward P/E (or $13.28 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Himax
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