Novice Investing - Blurry Vision at OmniVision

Date: Tuesday 13th 2008f May 2008 07:29:34 AM

Blurry Vision at OmniVision - 12/01/2006

By: Novice Investing Staff

OmniVision Technologies Inc. (OVTI) was mentioned last month as the potential candidate for our stock portfolio. We said it at the time that both its business and stock price is very volatile due to the level of innovation needed in the sector. On Friday December 1st, 2006, this proves to be true. OmniVision reported second quarter earning that misses analysts' estimate. Excluding charges, OmniVision earned $ 0.28 per share on an 8.6% increase in revenue. Estimate is for OmniVision to earn 30 cents during the quarter. Gross margin is higher at 33.1% for the quarter versus 32.5% expectation.

The company blame the quarter on higher sales on lower resolution of VGA products. That does not seem to make sense. Gross profit is higher than expectation. OmniVision also reported a $ 35.2 Million increase in inventory compared to prior quarter. Inventory now stands at $ 103.7 Million. Thus, percentage wise, inventory increase is huge. Further, OmniVision predicts third quarter profit between 5 to 12 cents per share versus 16 to 23 cents expectation. As a result, share is hammered, down 15% to $ 13.50 in early trade Friday.

Is this a buying opportunity or a sucker's bet? Late last year, OmniVision was also trading at around $ 13 range before charging up to $ 30 per share in Spring. Our believe is that if OmniVision can earn $ 1.00 per share, then current price is a decent entry. (We prefer $ 10 per share on our last article, if possible, however).

Let's talk about the bad and good of investing in OmniVision. Can you handle the bad? Well, no matter. We will talk about the bad first, then the good.

Bad # 1: Volatile Industry
In case you forgot, OmniVision is in the what the company called image sensory device. This is basically the camera on your cell phones. As you may know, what is a hot product in one day, may turn cold on the next.

Same thing with camera phones. Perhaps, suddenly, consumers feel like they don't need to have a camera installed on their phone. That would be very darning to OmniVision as they are the market leader in this category. Besides camera phone, you can find OmniVision product in video cameras, digital toy cameras or camera chips integrated into surveillance products. The demand for all these items are very volatile in nature. Therefore, OmniVision's entire revenue generator are relatively unstable.

Bad # 2: High Inventory Rise

When your inventory rises by 51% in one quarter, you better have some good explanation. Is OmniVision akin to a retailer where most of its sales is concentrated on ThanksGivings - Christmas period? Perhaps not. How about sales growth? OmniVision must have a torrid quarter over quarter sales growth, right? Err...no. Revenue for first quarter ending on July 2006 is around $ 137 Million. For the second quarter, revenue is flat at $ 138 Million.

Bad # 3: Tax Loss Selling

The year end is the period where selling begets selling. As investors aligned their portfolio for tax purpose, OmniVision is one of the stock that will get the boot. For your information, stock that do poorly in a particular year, will be sold by investors for tax loss purpose. Now, if tax loss action is severe, it is possible that OmniVision may fall to $ 10 per share before year end. However, it is still 30% away from current price.

How about the good? Surely, there are still some good left for OmniVision.

Good # 1: Solid Balance Sheet.

OmniVision without a doubt has a stellar balance sheet on its hand. It spotted $ 370 Million in positive net cash or half of its market capitalization. It will take many years of losses to lose this kind of balance sheet strength. If OmniVision operates at a loss of $ 1 per share annually, six years of losses of this magnitude is needed to bring its cash back to $ 0.

Good # 2: Profit, profit

Despite the negative earning announcement today, please do not forget the fact that OmniVision is still operating at a profit. Third quarter earning forecast is between 5 to 12 cents per share. We think that this is due to inventory rise described above. Management was trying to get rid of this inventory quickly and as a result, third quarter earning will suffer. Absence of this inventory rise, earlier expectation was a profit of around 20 cents per share. Extrapolating this quarterly number, OmniVision is expected to report an annual profit of 80 cents per share. OmniVision is not suffering a loss in any case.

Good # 2: Cheap Valuation

You heard that right. OmniVision is quite decently priced at this level. If earning comes in at 80 cents per share (which is conservative), OmniVision is currently trading at 8.43 forward enterprise earnings. Enterprise value is calculated by taking market capitalization and subtracting any cash on balance sheet while adding long term debt.

What should you do with OmniVision? Well, this definitely worth keep watching an eye on. As we said last time, if the price is right, we are willing to take the risk of owning OmniVision and ride the short-term storm. Next up will be the digging up of OmniVision's annual report. We need to do that first and then constructing a pro-forma income statement before deciding to add OmniVision into our sample stock portfolio.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.

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.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]