Detecting Static in Himax's Prospects

Some of the best bargains in the stock market can be found in the small percentage of initial public offerings that receive little fanfare from the media. That's because most investors don't take the time to read a company's prospectus before shares debut, and thus miss out on critical information and avoid the stock as a result. However, these IPOs can also be a recipe for disaster for the same reason.

One offering that caught our attention was the March 31 debut of Taiwan-based Himax Technologies (HIMX Quote), a semiconductor company that makes chips for televisions and other electronic devices that use flat-panel displays. However, after researching the company thoroughly, we believe shares should be avoided.

The company sold 52 million shares at $9 each, the high end of the indicated pricing range of $7.50 to $9 a share. Shares quickly sold off, however, as competitor Genesis Microchip(GNSS Quote) issued an earnings warning the prior evening that weighed on the entire group.

The market for chips that go into high-end televisions has been on fire, as flat-panel televisions now make up about half of all sets sold each year, and as industry forecasts call for volumes to double again in 2006 to about 40 million flat-panel sets sold. Himax's revenue growth has been equally as impressive. The company turned in sales of $540 million in 2005, a full 80% ahead of 2004 levels and a fourfold leap from 2003 sales of $131 million.

However, we gleaned several red flags from the company's prospectus, which is filed with the Securities and Exchange Commission.

The first one was that of the 52 million shares being offered in the IPO, just 12.562 million were actually coming directly from the company. The rest -- 39.438 million -- were shares being sold into the market by insiders and large shareholders. In other words, a majority of the proceeds from the offering are going to individuals and not into Himax's corporate coffers.

What's of greater concern, though, is that the company's take from the deal, which is worth about $113 million, will be used in part to pay back a small loan that financed a special cash dividend in November 2005 and to build a new corporate headquarters. So the company financed a $13.6 million one-time dividend that disproportionately benefited its largest shareholders, including its largest customer, CMO, through debt that new shareholders helped to repay.