Apple Inc. (AAPL): Buy a Supplier at a Great Price

Page 1 of 2

I try to focus some of my attention on finding investment opportunities that are not well known and/or are undervalued relative to their potential for growth. One such company is OmniVision Technologies, Inc. (NASDAQ:OVTI), a manufacturer of image sensor chips that are used in a variety of electronic devices. After a few years of disappointing earnings, this company that traded for more than $30 per share less than two years ago is trading for less than half of that amount, despite the fact that this year’s revenues are projected to be the highest ever for the company. Additionally, the company has a substantial amount of cash on its balance sheet that caught my attention and made me wonder why it isn’t more expensive.

About OmniVision Technologies

OmniVision Technologies, Inc. (NASDAQ:OVTI) produces image sensors for use in mobile phones, webcams, cameras, and other applications. Their chips are most notably used in some of Apple Inc. (NASDAQ:AAPL)’s products, such as the iPad Mini and iPad 4, as well as the front (facetime) camera on the iPhone 5. Other customers of OmniVision include HTC and Motorola Mobility, as well as BlackBerry.

OmniVision Technologies, Inc.

In recent years, OmniVision has been very reactive to Apple Inc. (NASDAQ:AAPL)’s new products. What happens is that an independent tech analyst will essentially dissect whatever Apple’s latest product to see who made the parts. For example, investors were holding their breaths due to rumors that Apple Inc. (NASDAQ:AAPL) discontinued the use of the company’s camera chips, and shares rallied when it was discovered that the front camera was indeed an OmniVision chip, as it had been in generations past.

In the past, OmniVision had the most advanced image sensing technology available, but it seems that other manufacturers have closed the gap recently, which has significantly hurt the average selling prices of their products.

The Numbers Game

Despite the challenges, OmniVision may just be cheap enough to take a chance on. At the current share price, the company trades at just 10.9 times the current fiscal year’s consensus earnings, which are set to be reported on May 30. The consensus calls for earnings to grow to $1.57 and $1.71 in 2014 and 2015 respectively, for annual earnings growth of 14.5% going forward.

These estimates only tell half of the story, in my opinion. First off, I think the earnings and revenue projections are very conservative. Remember, a company like OmniVision is only as successful as the OEMs it sells to, and projections for some of its customers like Apple Inc. (NASDAQ:AAPL) and BlackBerry are less than stellar. If they surprise to the upside in terms of number of units sold, this could greatly help OmniVision’s bottom line.

Also, the real story here is cash. As of the end of last fiscal year (which ended April 30, 2012), OmniVision reported $333 million in cash on its balance sheet, and just $39.3 million in debt, for a net cash position of $293.7 million. This is very impressive considering that the company’s entire market cap is just $772 million. When taking cash out of the equation, OmniVision’s business is valued at just $478.3 million, or a P/E of just 6.8 times this year’s earnings. This is amazingly low for a company with such a stable balance sheet and a solid record of profitability.

Think of it like this….OmniVision is worth less than half a billion dollars (according to the market), and their cameras have been in each and every one of the 55 million + iPhone 5’s that have already sold, and the 26 million that are projected to sell in the current quarter. Assuming that Apple Inc. (NASDAQ:AAPL) uses their camera in the future generations of the iPhone (highly likely), this aspect of their business alone is worth more than the current valuation. Their cameras are already in the iPad 4 and mini also, the leaders in the tablet PC world.

Page 1 of 2