At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the worst...
JPMorgan Chase elicited cheers from the peanut gallery Thursday when, just hours before OmniVisionTechnologies (NAS: OVTI) reported earnings, the global megabanker sounded the all-clear signal and told investors to quickly buy the stock ahead of the good news.
And you have to admire the courage of this analyst, bravely clambering out a limb, where other analysts feared to tread, and putting its reputation on the line with a rushed, shoot-from-the-hip judgment on a stock's chances of beating earnings just minutes later. There was just one problem. JPMorgan was wrong.
Right on the facts, wrong on what matters
Oh, sure, in one respect JP got this one right. OmniVision did do more business than most folks thought it would, posting revenues of $218.5 million for the quarter, comfortably ahead of consensus estimates of $205 million. The better-than-expected revenues may allay some concerns that OmniVision has lost market share to Sony (NYS: SNE) , as some have posited in the past. But that's not the point.
The point of capitalism, and of capitalist enterprises like OmniVision, isn't just to sell a lot of stuff, but to sell this stuff at a profit. And that's where OmniVision fell down. While it apparently sold a lot of camera chips, a decline of more than eight percentage points in gross margins showed that OmniVision made a lot less profit from selling these chips than its fans had hoped to see.
Fiscal Q4 profits of $0.20 per share missed the consensus number by a good 9%. (Adding to the pain, these weren't even real GAAP profits, but just "adjusted" profits. From a GAAP perspective, the company earned just $0.05 per share.) Worse, it seems fiscal Q1 2012 won't be much better. As part of its earnings announcement, management warned investors to expect Q1 adjusted profits of just $0.27 at best (a penny short of consensus) and $0.16 per share at worst (a whole lot worse than consensus).
Result: OmniVision shares that soared 6% in the wake of JP's surprise endorsement quickly reversed course and shed 8.5% of their value in after-hours trading.
How could they have known?
Was this disaster avoidable? In a word: Yes. I avoided it myself.
After publicly recommending the stock in November of last year (a recommendation that outperformed the market by 21 percentage points, thanks for asking), I began losing confidence in OmniVision earlier this year, and closed out my positive CAPScall. The reason: OmniVision's deteriorating cash position, a trend clear to anyone who bothered to look for it.
Over the past 12 months, you see, as OmniVision reported GAAP earnings of nearly $100 million, the company's cash flow statement showed progressively worse results. In four quarters' time, the company burned through $105 million in negative free cash flow. And while Q4 results do not contain up-to-date cash flow information, it seems safe to assume that with earnings taking a big dive, the results (whenever OmniVision bothers to release them) will not look good.
Foolish final thought
Given these numbers, there was little logic behind JPMorgan's decision to place a big, hasty bet on OmniVision ahead of results. Fact is, if you want to place a bet on suppliers likely to profit from the success of the Apple's iPhone, there are any number of firms to choose from. Just not Sony. (If profits are the standard by which we're to judge a business, then Sony is arguably one of the worst-run companies on the planet.)
Sony and OmniVision aside, though, there's still:
Skyworks Solutions (NAS: SWKS) , which makes the iPhone 4S' power amplifiers, and sells for an attractive 25 P/E ratio, with strong free cash flow to back it up.
And of course Qualcomm (NAS: QCOM) , maker of the iPhone's baseband chip. With free cash flow that fully backs up reported income, and a modest, unassuming 17 P/E ratio, Qualcomm looks to me like a much better bet than OmniVision.
And that's just for starters. To see which of the other iPhone suppliers our Foolish tech experts believe are best-positioned to profit, read our free report on the industry right here. It's free for download today, but won't be for long -- so click quick.
At the time thisarticle was published The Motley Fool owns shares of Qualcomm, but Fool contributorRich Smithdoes not own shares of, or short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 337 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in AppleWe Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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