Even during a down period for the markets, Himax has gone against the grain, climbing to $8.51. Its shares have yielded a 27.2% return over the last six months, beating the S&P 500 by 29.6%. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Himax, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Himax Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Himax. Here are three reasons why we avoid HIMX and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Himax’s 5.7% annualized revenue growth over the last five years was tepid. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Himax’s revenue to drop by 7.1%, close to its 5.7% annualized growth for the past five years. This projection doesn't excite us and indicates its newer products and services will not catalyze better top-line performance yet.
3. Weak Operating Margin Could Cause Trouble
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Himax was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.2% was weak for a semiconductor business. This result isn’t too surprising given its low gross margin as a starting point.
Final Judgment
Himax’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 24.1× forward P/E (or $8.51 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Like More Than Himax
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