J.P. Morgan is downgrading OmniVision Tech (NASDAQ:OVTI) to Neutral from Overweight with a $35 target (unch).Firm believes OVTI’s prospects remain very encouraging through 2011, so they believe the stock still has potential upside, however, they also believe investors should now wait for a better entry-point or for better visibility into the gross margin outcome of the transition to second-generation back side illumination product in mid/late 2011. OVTI has appreciated by 125% YTD, versus 11% appreciation in the S&P 500, and they think there are better returns to be had elsewhere in JPM coverage universe at this time. Firm's December 20110 Price Target remains $35.00.
JPM is not introducing any changes to estimates. If anything, reports from Reuters that the second generation iPad will feature forward- and rear-facing cameras, is a potential source of upside to their F4Q11 forecast. They remain below consensus for FY11 and FY12, which reflects their view that gross margins will probably decline in the first half of FY12, and that there will be a seasonal slow-down in sales in F4Q notwithstanding ramping shipments at Apple.
They remain constructive regarding OVTI’s multi-year prospects. JPM believes OVTI’s 3-year growth of about 20% CAGR will be buoyed by ramping demand for higher quality image sensors in multiple endmarkets, including smart phones, laptops, autos, games, medical devices, surveillance equipment and digital cameras. They believe OVTI has established a strong leadership position and a 6 - 12 month advantage in cost of production, relative to Samsung, Sony and Aptina. Execution is first-rate. They expect the board to use excess cash to drive shareholder value through buy-backs.
JPM notes they have two near-term concerns: 1) that gross margins will dip in the next 6 - 9 months as the company ramps production of BSI generation-2 product at low initial-yield rates, and 2) that the firm will encounter a seasonal inventory re-adjustment post Chinese New Year.
OVTI is trading at 17 times revised CY11 PF EPS of $1.92, which is approximately aligned with the mean of our coverage, and a slight premium to the firm’s 5-year mean P/E trading multiple. The multiple does not take into consideration ~$6.88 per share of cash; so on an ex-cash basis, OVTI looks more attractive and there could still be upside for the stock. That said, with OVTI up 125% YTD they believe the stock is trading closer to fair value now, and on a risk-reward basis, they think there are better 6 - 12 month returns elsewhere in their coverage universe. JPM expects OVTI to trade in line with the mean of their coverage over the next 6 - 12 months.
Notablecalls: Paul Coster & his team are the Axe in OVTI.
- He upgraded the sensor maker back in April-09 when the stock was trading around $9/share. It was a gutsy call and he has stuck by it ever since, gradually raising his estimates and target.
- The call is an intelligent one - not overly dogmatic. Now that the rest of the Street is warming up to the story (iPad cams etc), Coster is telling his clients to start taking profits.
This may be a valuation call but it's a damn good one. I suspect vanilla sellers will show up after open. Stock should be under pressure in the n-t.
I think some fast money guys jumped on board following the bullish Opco call on Friday.
The market is looking up this morning (surprise, eh), so I suggest you don't sell it in the hole pre mkt but rather wait after open.
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