A Prudent Vision

09/17/2004 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

"We are huge fans of the semiconductor sector," says John Buckingham, editor of the top-performing The Prudent Speculator. "We not only like chips, but also believe that valuations among our buys are remarkably cheap. That's certainly the case OmniVision.

"OmniVision Technology (OVTI NASDAQ), an imaging chip manufacturer, caters to one of the highest-growth areas of tech camera phones. Its new line of chips couples the favorable image quality characteristics of dominant charged couple device-based technologies with the low cost and power and higher flexibility traits of CMOS-based chips. The company believes those benefits will excite demand from digital still and video camera makers. Further, OmniVision is targeting several other growth areas, including PC, automobile and medical markets, which could prove important drivers of growth in the future. 

"We’ve been keeping our eye on waiting for the shares to get a bit cheaper. And that's just what happened. The company recently turned in superb earnings growth, while offering guidance for weaker days ahead. OmniVision reported fiscal first quarter 2005 (ended July 31) revenue of $98.8 million, more than double year-earlier levels. Earnings came in at $0.32 per share, far better than the $0.12 per share generated in the first quarter of fiscal 2004. Moreover, the performance beat analyst expectations for earnings of $0.30 per share on revenue of $97.7 million. Importantly, gross margins rose and inventories fell during the quarter.

"Unfortunately, revenue did decline 1% sequentially, reflecting a seasonal decrease in digital camera demand, pricing pressures, the fact that the customers were waiting for the new series of chips from the company. Even worse, the company said it will reduce production and shipment of its older chip models, while it ramps production and shipment of its new series of chips, a shift that is negatively impacting the current quarter's performance. So for the fiscal second quarter of 2005, OmniVision looks for revenue between $80 million and $90 million and earnings between $0.20 and $0.25. According to Reuters Estimates, the Street had been looking for earnings of $0.32 per share on revenue of $102.8 million.

"All that said, we'll once again defer to valuation as our true attraction to the shares, which currently trade at 1.7 times trailing twelve-month revenue, 9 times earnings, and 1.9 times tangible book value. Valuations are about the same for the current fiscal year's expectations given by Reuters, so no one is currently admitting to any huge breakdown for the company over the next few quarters. In addition, the balance sheet is in excellent shape with $4.39 per share in cash and no long-term debt. We've set our targets for the shares at $21 to $25 per share, and are buyers of this 'Cash is King' company up to $12.60."

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