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Chandan Dubey
Chandan Dubey
Articles (150) 

Companies with Buybacks: OVTI Edition

December 11, 2011 | About:

OmniVision (NASDAQ:OVTI) designs and markets high-performance semiconductor image sensors. Its OmniPixel and CameraChip products are highly integrated single-chip CMOS image sensors for mass-market consumer and commercial applications such as mobile phones, notebooks and webcams, digital still and video cameras, security and surveillance systems, entertainment devices, automotive and medical imaging systems.

Balance sheet Omni has a pristine balance sheet. The main items are shown below:

Oct 31, 2011Apr 30, 2011
Cash$ 427,694$ 379,379
Current assets856,263730,971
Total assets1,211,5441,034,158
Current liability222,180148,919
Total liability370,827282,833
Shares (diluted)60,20757,680

As we see, Omni has enough cash to pay all liabilities and still have $1 per share in cash. If we use the current assets, then paying all liabilities it will have $8 per share. Omni has traded as low as $10.5 in the last three months and is currently trading at $13.73.

Valuation Omni has been a consistent cash generator.

Free Cash Flow1.89M-2.69M33.56M87.27M108.71M-40.83M36.95M13.01M34.78M126.98M

Although not copious, the cash generation is there. The current market cap of $860 million (starting from $126 million free cash flow), the market is expecting a negative FCF growth worse than -8% at a 10% discount rate. Although, for a business of this predictability I will not put much into the DCF calculation.

Share dilution

  • As of July 15, 2011, we had 345,408 shares available for grant in the 2007 Plan, 3,757,132 outstanding stock options with a weighted average exercise price of $19.3859 and weighted average remaining contractual term of 5.50 years and 2,507,869 outstanding full-value awards (e.g., RSUs). The 2007 Plan is our only currently active equity award plan.
  • The executives received $3.8 million in RSU and 2.7 million in stock awards. The company had diluted nearly 2 million of stock each year since 2001. This is a burn rate of almost 4%. Even after such outrageous dilution the executives own less than 2.2% of stock as of the last proxy statement.

Omni’s stock is suffering from many problems. Some of them are listed below.

  • Omni was the main camera maker for iPhone 3 and iPhone 4 and the market was expecting the same for iPhone 4s. But this now seems to be not the case. Sony has won this round.
  • The other user of Omni’s cameras, HTC, has also forecasted a lower guidance for its sales. This will also hurt Omni’s top line.
  • Omni lowered is third-quarter guidance to $212 million revenue to $217 million. Separately, towards the end of the second fiscal quarter, the company started to ship in very limited quantities the OV8830, the company's 8-megapixel OmniBSI-2 based product. The company sees third-quarter earnings of 5 to 17 cents per share and revenue of $160 to $180 million, versus consensus views calling for earnings of 26 cents per share and revenue of $201.4 million.

OmniVision has announced that its board of directors authorized a program to repurchase up to $100 million of the company's outstanding common stock, effective immediately. I have following to say about this buyback.

For a company with $800 million in market cap, it is sad that they have no other use of 100 million cash than to buy back shares. It can be argued that the current stock price values the company quite badly and hence a buyback is good use of capital. But with this buyback the company will not even be able to buy back the shares which it has diluted on compensation so far. The company's share count has gone from 44 million in 2002 to 60 million in trailing 12 months. If we look at the insider activity, they have been selling shares and getting stock awards. They have not bough any shares in the last year, even after the share price has taken a beating.

More troubling, Ominvision’s moat has been threatened (if it can be called a moat). Sony has already nicked the Apple contract. I would stay away from this stock unless it goes below $9 per share. It might get interesting then, but purely because it will have more than that in current assets minus liability.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 2.3/5 (9 votes)


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