Novice Investing - OmniVision's Clear Vision

By: Hari Wibowo

Industry Background

OmniVision Technologies Inc. and its subsidiaries engage in the design, development and marketing of semiconductor image sensor devices. In plain language, OmniVision make things like your camera phone or security devices found in the office buildings.

Shares of OmniVision has languished recently to $ 13.68 in concern that competitors will start producing similar or even superior products. The concern is a valid one. After all, not a lot of people will notice if Nokia changes its camera in its cellular phone from one brand to another. In other words, OmniVision's products lack brand equity. On the other hand, consumer knows the difference between a Motorola phone and a Nokia phone.

Having said that, OmniVision might be a good investment prospect at a low enough price. I am not real familiar with this kind of technology. Therefore, the estimate shown below might not be accurate nor useful.

Revenue Estimation

Concerns regarding competitors are valid. OmniVision might not earn as much in the future. Revenue for fiscal year 2005 and 2004 was $ 388 M and $ 318 M respectively. However, revenue for the first quarter of 2006 was $ 95.9 M, representing a 0% growth. Let's assume that revenue will decline 5% from fiscal year 2005. This brings revenue figure at $ 369 M.

Gross Profit Estimation

Gross profit for OmniVision for the fiscal year 2005, 2004 and 2003 are 40.2%, 39.0% and 38% respectively. While the trend looks positive, gross profit for the first quarter of 2006 is 'only' 33%. To be conservative, let's use 30% gross profit margin for the entire fiscal year 2006.

SG&A and R & D Estimation

We lump these costs together since I am not really sure how to best predict it. For the first quarter of 2006, these costs amount to $ 15 M. Extrapolating, total cost for fiscal year 2006 will be $ 60 M, an increase of about 9 %.

Interest & Income tax expense

OmniVision has no long term debt and $ 300 M in the bank. Predicting a $ 0 interest expense is fairly conservative. Meanwhile, income tax has ranged from 29 - 35 % in recent years. Let's just use the 35% figure just to be conservative.

Shares Outstanding Estimation

In recent days, OmniVision has 56.2 M shares outstanding. Assuming a 10% dilution for fiscal year 2006, OmniVision will have 61.8 M shares outstanding.

Fair value of the stock is 3% above current free risk interest rate (10 yr bond)

We will skip the current ratio part as I believe that OVTI has more than enough liquidity to survive within the next twelve months.

As of 11/04 2005, 10 yr bond yields 4.66%. The stock needs to yield 7.6% to give it a fair value. P/E value for OmniVision Technologies is therefore13.2. Using the assumptions listed above, EPS for fiscal year 2006 comes in to be $ 0.54

The fair value for OmniVision's business (real price) is therefore $ 7.13. Meanwhile, Cash per share for the company is $ 5.33/share and Long Term Debt per share = $ 0.00/share.

Real price = stock price - (cash+ short-term investment)+ long-term debt.

Stock price = $ 7.13 + $ 5.33 - $ 0.00 = $ 12.46 /share.

Conclusion

Current stock price for OmniVision is $ 13.68 while the predicted fair value is $ 12.46 per share. This means nothing since the estimate used is fairly crude and lot of assumptions used here might not be true.

Mean EPS estimate found in Yahoo! Finance is $ 1.18 while my estimate is $ 0.54. I am sure analysts there are a lot more familiar than I do about the sector. As a result, I am not confident predicting $ 1.18 earning with 100% certainty. The fair value of OmniVision with $ 1.18 of EPS is $ 20.91, which represents 50% potential price appreciation from the current price.

If you are 100% confident that the company can achieve such EPS for fiscal year 2006, you should definitely buy the stock at current price of $ 13.68. I am not that certain about that. Therefore, we won't pick OVTI as our sample portfolio pick.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding OmniVision Technologies Inc. (OVTI) or other securities.

Pro Forma Income Statement for OVTI (fiscal year ended on April '06)
Revenue	$ 369 M
Cost of Goods Sold	$ 258 M
Gross Profit	$ 111 M
SG & A	$ 60 M
Interest Expense	$ 0 M
Profit Before Tax	$ 51M
Income Tax Expense	$ 18M
Net Income	$ 33M
Shares Outstanding	61.8 M Shares
EPS Estimate	$ 0.54