Novice Investing - Visioning a Deja Vu At OmniVision

Date: Tuesday 13th 2008f May 2008 07:17:37 AM

Visioning a Deja Vu At OmniVision - 09/01/2006

By: Novice Investing Staff

We wrote about OmniVision Technologies Inc. (OVTI) back on November 2005. At the time, we applauded the strength of its balance sheet but remain cautious of the prospect of producing a sustainable profit. We conservatively estimate OmniVision's earning per share to be $ 0.58, while most analysts predict $ 1.18.

Of course, we did not quite understand the business then. Fast forward nine months later, it turns out that OmniVision can earn $ 1.00 per year after all. In fact, it earned $ 1.56 per share for the past twelve months. With that mind, it seems like a Deja Vu that OmniVision is trading near the level of last year. When we wrote about it, OmniVision was trading at $ 12.50 + per share. Today, it trade down 4% at $ 15.75. While, it is up 25% since November 2005, it had risen to as high as $ 34.50. Will the second door of opportunity open for buying OmniVision?

What is the culprit behind the recent drop in stock price. Late thursday, OmniVision reported first quarter earning of 28 cents or $ 15.9 Million. Revenue grew 43% to $ 136.9 Million, but missing estimate of $ 139.8 Million. While shipment of new sensors for digital handsets help propel revenue, it is not enough. Furthermore, for the second quarter, the company ratcheted down expectation with a profit estimate of between 26 to 34 cents per share versus 42 cents estimate. As a result, share price traded down in early trading.

Despite that, let's look at the bright side here. OmniVision owns one of the most cleanest balance sheet with $ 354 Million in positive net cash in recent quarter (April 2006). This cash had grown tremendously since say 2004 where it was $ 217 Million. With positive net cash of $ 354 Million or $ 6.50 per share, OmniVision is a solid business to invest in. Our next task is to figure out if they can continue to earn $ 1.56 per share for the foreseeable future. For April 2007 fiscal year, OmniVision is expected to earn $ 1. 66 per share. This is before they reported disappointing first quarter earning.

Recent trade shows that OmniVision fetches a price of $ 16.00 per share. With $ 6.50 positive net cash and $ 1.66 expected EPS, OmniVision is trading at 5.72 times earnings. Even if earning falls to $ 1.00, OmniVision still fetches a 9.5 times earning, which is a decent one to have. The biggest problem for OmniVision is the sustainability of its profit. It is in a fast-moving digital sensor industry where the future is relatively unclear. You can be on top one moment and completely trashed on the next. For this kind of industry, we suggest lower price earning ratio for the stock's fair value. Instead of 12.5 times earnings (8.5% return), investor can peg OmniVision's fair value at 10 times earnings ( 10% return).

We must admit that it is a pleasant surprise that OmniVision can still trade down from the $ 30 reached just this past spring. This might be the second buying opportunity for those investors that missed it. Keep this one on your buying screen and start researching. This might be a decent investment to have.

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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 any other securities.

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