Zack’s rates our first recommendation a value “Buy” based on “a P/E ratio of 14.09% compared with the industry average of 16.45%. Our second is a “Sell”
Photronics Inc. (PLAB)
From Technology and Opportunity
Not to be confused with the entire field of “photonics” Photronics Inc. (PLAB) is small technology firm that provides a unique fabrication tool for creating advanced chip circuit designs—something called a photomask.
Photomasks are essentially high-precision plates made of quartz that contain images to be printed microscopically on electronic circuits. In short, Photomasks use light to transfer complex, geometric patterns onto computer chips. Photomasks are already essential for many of today’s electronic components including semiconductor chips and flat panel displays. In complex integrated circuits, a modern CMOS wafer will go through the photomask cycle up to 50 times.
The company has nine manufacturing facilities internationally, with locations in Germany, South Korea, and the U.S., among others. 70% of Photronics’ income comes from international operations, adding some Forex risk.
Photronics has approximately 600 customers, but its five largest customers were responsible for 43% of sales. Besides the Forex risk, this is the next biggest concern, but it’s not a huge one. Recently, Photronics has been benefiting from advanced circuit designs for consumer products including smartphones and tablets. Photronics’ product line has been seeing high demand from recent innovation in the display industry—namely 3D, smart TVs, and high resolution AMOLED displays.
Typically, in the semiconductor equipment industry, higher global chip production is key to growth. For photomasks, however, new designs are the primary driver for increased demand, because new designs require new photomasks (companies will eventually insource their photomasks).
Profit margins have been steady over the last three years, averaging around 6%, but the firm stands at 8.5% as of its latest 10-Q. Net income and revenue have picked up over the last year, growing 20% and 22% respectively quarter over quarter.
Overall market growth for photomasks is modest, but the industry is safe due to the essential nature of photomasks in bringing new products to market.
Photronics has $205 million in cash, overtaking its $132.6 million in debt. Annual net income was last reported at $44.6 million. Forward P/E is 11.89.
We rate Photronics a Buy under $13.50. The risk level is Medium.
Jason Stutman, Technology and Opportunity, www.angelpub.com, 877-303-4529, January 2016