OmniVision Sees Challenges
OmniVision (OVTI) is a fabless OEM (an original equipment manufacturer who outsources chip fabrication) of image sensors and support circuitry used within handsets and applications in other mass markets. The Sunnyvale, CA firm is currently rated a Hold with a $15 target price. Shares have fallen from $24+ peak just about one year ago, now trading just over $12 per share.
The shares have traded down over the last two months, but we are reiterating our Hold rating in view of uncertainties in consumer spending and possible market share losses in China.
OmniVision has a strong position in the fast growing CMOS image sensor market and is particularly dominant in the camera phone market. All the top handset manufacturers have expressed interest in the BSI technology and the product will be incorporated into cell phones shipping in 2009.
The company is protecting market share at the low end, with a corresponding negative impact on the gross margin. Also, the transition to high-resolution higher-margin product appears to be going slower than initially expected.
Penske Auto Outlook Dampens
Penske Automotive Group, Inc. (PAG) is well positioned among the auto retailer peer group. The company's specialty and luxury product mix offer opportunities for long-term growth. Additionally, we are encouraged by positive same-store sales in used vehicles. However, rising interest rates, challenging industry conditions and a leveraged balance sheet dampen our outlook on the stock. Thus, we rate the shares a Hold with a six-month target price of $14.
Penske Automotive is pursuing a strategy of achieving internal growth from its existing dealerships, as well as from strategic acquisitions. The company historically has grown 6% faster than its peers and the goal is to grow 10% per year for the next few years. In the near term, this trend is likely to continue, as the company is the exclusive distributor of the Mercedes-Benz smart fortwo. PAG estimates that it will deliver 20,000 to 25,000 vehicles in 2008 and will generate between $0.08 and $0.12 per share in incremental earnings.
A key part of the company s strategy is to grow in Europe, a location where business has grown from $900 million to $4.5 billion in the past five years. In 2007, the company acquired 11 franchises that are expected to generate around $450 million in annualized revenue -- $300 million in the US and $150 million internationally.
Recently, PAG announced that its Board of Directors has authorized the company to repurchase up to $150 million of its outstanding common stock, depending on market conditions, share price and other factors.
Animal Health Volume Increasing
Animal Health International, Inc. (AHII) reported lower-than-expected fourth-quarter net income of $2.7M, or EPS of $0.11. Nonetheless, EBITDA increased 27.2% year-over-year after adjusting for a one-time charge in the comparable quarter last year, and was driven primarily by an increase in sales volume.
We are encouraged by the expansion of gross profit margins and continue to believe the company is well positioned to take advantage of currently challenging economic conditions to grow its production animal business via acquisition. We retain our Buy recommendation at current levels.
With a significant number of products expected to lose patent protection over the next several years, we believe the company is well positioned to enhance margin expansion through the incremental addition of private label products to the product mix. We have valued AHII on a forward price/earnings basis, as well as a comparison to similar firms in the animal health products sector.
