The Long Case for OmniVision: Like Buying a Dollar for Twenty Cents

Raise your hand if you have a camera phone…Ok, now raise your hand if you would be interested in buying a dollar for 20 cents. Introducing Omnivision (OVTI), a leader in designing the camera technology used in mobile phones as well as any other electronic device which needs high-resolution camera technology in a compact design.

Obviously it’s been a great time to be in this market, with the exponentially increasing % of phones which include a camera. OVTI’s revenue has grown at >20% for the past 3 years after doubling in 2003. Without telling you more, you’d think this was a high-flying stock but that’s the reason I’m writing: it’s not.

As a background: two years ago OVTI was at $15, when it subsequently doubled to peak at $34 in May 2005. It then apparently got caught up with the emerging markets and the rest of the tech stocks but never really broke out of its downtrend like the rest of the market - currently it’s trading back down at $12.50 and I think it’s a steal. The only explanation for this poor valuation that I can come up with is the fact that this stock is known to be heavily traded by hedge funds (according to a GS hedge fund survey); approximately 35% of the float’s shares are short currently, and liquidity in this stock is light enough that somebody/a hedge fund could keep the stock in a range if they really wanted to. But this can’t last forever and I think this provides opportunity for investors to make tons of money.

When valuing OVTI it must be said that the company is a cash cow - it’s amazing to me that this stock can trade at such dirt cheap valuations given the abundance of cash on the balance sheet - the stock is currently trading at ~$12.50 share and there is roughly $6.50/share of cash on the balance sheet - basically you’re buying the operations of this company for $6 give or take. So I became interested and wanted to find out what valuations this stock has traded at historically.

The way I looked at it there was a “liquidation value” and an “operations” value which sum up to the market cap. of the stock. The liquidation value assumes OVTI could liquidate its accounts receivables for 90% of their value and current inventory, PP&E and other various assets for 50% of their current balance sheet value - both conservative estimates. Now, if OVTI liquidated these assets and along with its cash paid off all of its liabilities what would be left? That’s the “liquidation” value.

Then, I said, the market is valuing their operations as the difference between the Market Cap. and this “liquidation” value - call this difference the Implied Operations Value. But I needed a multiple to compare current and historical valuations and thus came up with: “Implied Operations” Value/Cash Flow From Operations - the company has little to no debt so the CFO is flowing straight through to shareholders (except for some minor capex expenses) - I would have used free cash flow but the comp. was difficult since they just made an acquisition last year (which affected capex in an unusual way) but in general, when thinking about the value of the operations of OVTI, I think CFO is a fair metric. The results for this IOV/CFO multiple were pretty interesting.

Currently the IOV/CFO ratio stands at ~4: meaning as an investor you could buy the entire company and the CFO would pay off your investment in the companies’ operations in approx 4 years (again, not thinking about capex, but this isn’t a capex intensive company). On Jan. 1 2007, the IOV/CFO was 10, in 2006 it was 6, and in 2005 it was 25 - clearly something about today’s valuations does not make sense - and I think this provides opportunity.

I’m not the only that sees this - within the last month there have been rumors/speculations that Kodak (EK) may be thinking about an acquisition of OVTI to diversify into the digital market - at these valuations the acquisition makes sense but for us regular investors, this investment really makes sense - it’s like buying a $1 for 20 cents! Get long some OVTI and we’ll give an update in 6 months - you’ll probably be able to buy yourself the best camera phone on the market with your profits.

Disclosure: Author has a long position in OVTI

OVTI 1-yr chart

Comments

[kdo:]

You know I've sort of put OVTI on the too hard pile and so let me play devil's advocate here. Obviously with the short interest here - someone is seeing something going on, so let's see. OVTI is a small time semiconductor manufacturer playing with much bigger players all around it on a commoditized product. It also has a very small number companies it is selling to, which give them immense pricing power over OVTI.

Let's see what's happened to their operations. NOP for the last quarter is down to $341K from $35.6 Mil. Interest Income now results as almost all of their "profit" of $4.1 Mil. But if we use that number and add in their cash hoard when making a valuation upon the enterprise, then we're double counting. Let's pay dollar for dollar of the cash, but not count that in our profit statement.

Cash Flows over the last 9 months has dropped precipitously from '06 too, mostly in the recent period. So they are having some serious operational changes. If we want to count CF to EV - over the last 9 months we have $28.5 Mil - $10.9 Mil Interest income bringing the starting NI number to $17.6 Mil on a company which competitively for all I know is striking disaster (I don't, I've only looked at numbers so far, but this is not exactly a company that seems to have a defineable moat and the last quarter brought $341K before tax). We can add back depreciation on the latest quarter, I'm not adding back the stock compensation for time's sake and it looks like a lot of the other cash flow is from changes in assets and liabilities. Purchase of capex seems to take the CF number negative - so perhaps the NI number is better. I know $17.6 Mil is only nine months, but it seems we have some sort of short term problem that needs investigation and the last quarter's number doesn't exactly give me a ton of hope that $17.6 isn't a vastly overstated figure going towards the future - especially when I see the short interest in the company. So I do question exactly what kind of company I'm buying after the EV, because I have no insight as to it's future earnings capability are. Answer what the short term operational difficulties are, exactly what the short case is (plus why it's wrong) and what their long term competetive picture is and you'll have a better case.

2007 Apr 20 03:47 PM

[ofaisalo:]

Sounds attractive. However the growth in revenues and earnings has been negative lately. I am afraid thats what push buyers away from the stock. What do you think?

2007 Apr 21 01:19 AM

[borisb:]

the annulized revenue block of about $400 million-ish is dangerously small scale relative to other semi players. they hardly have the size to make large R & D investments to making up waning demand for their one hit wonder product line now more comoditized then ever. this is just a speculative tier 2 semi company on hard times.

2007 Apr 21 07:36 PM