BUSINESS
Photronics, Inc., together with its subsidiaries, engages in the manufacture and sale of photomask products and services in the United States, Taiwan, Korea, Europe, China, and internationally. The company offers photomasks that are used in the manufacture of integrated circuits and flat panel displays (FPDs); and to transfer circuit patterns onto semiconductor wafers, FDP substrates, and other types of electrical and optical components. It sells its products to semiconductor and FPD manufacturers, designers, and foundries, as well as to other high-performance electronics manufacturers through its sales personnel and customer service representatives. The company was formerly known as Photronic Labs, Inc. and changed its name to Photronics, Inc. in 1990. Photronics, Inc. was incorporated in 1969 and is based in Brookfield, Connecticut.
INVESTMENT RATING
PLAB is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Photronics has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Photronics has a neutral Appreciation Score of 54 but a very high Power Rating of 85, triggering the Positive Value Trend Rating.
Photronics’ stock is selling well below targeted value. The current stock price of $26.88 compares to targeted value 12 months forward of $46.
This neutral appreciation potential results in an appreciation score of 54 (46% of the universe has greater appreciation potential.)
Photronics has a Power Rating of 85. (PLAB’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 15% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; and the recent trend in PLAB’s earnings estimates has been favorable. An offsetting factor is the Semiconductor, Related Devices comparison group is in a slightly weakened position currently.
INVESTMENT PROFILE
Photronics’ financial strength is high. Financial strength rating is 72.
Relative to the S&P 500 Composite, Photronics Inc has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that PLAB is normal risk. Low financial leverage is a positive for Photronics. Relative weaknesses include: low historical profitability, and high stock price volatility. Photronics’ valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. PLAB has unusually low market capitalization.
CURRENT SIGNALS
Photronics’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Photronics’ current technical position is very strong. The stock price is in a 3.7 month up move. The stock has appreciated 79.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Photronics Inc (NASDAQ: PLAB) has recently experienced meaningful negative changes in investment behavior: the stock fell on very heavy volume.
Photronics Inc (NASDAQ: PLAB) has recently enjoyed slight positive changes in fundamentals: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
Photronics Inc (NASDAQ: PLAB) has reported earnings for its first fiscal quarter (ending January 31) of $0.43 versus $0.23 for the same period a year ago. For the latest four quarters through January 31, E.P.S. were $2.25 versus $1.80 for the same period a year ago.
Photronics Inc (NASDAQ: PLAB) stock closed at $26.88 on 2/21/24 after a major decline of -13.9%. Moreover, exceptionally high trading volume at 280% of normal accompanied the decline. The stock has declined -19.7% during the last week but has been exceptionally strong relative to the market over the last nine months.
CASH FLOW
In 2023, Photronics generated a very significant increase in cash of +$153.7 million (+43%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$333.9 million. Non-operating uses consumed -$56.8 million (-17% of EBITDA). Cash taxes consumed -$70.3 million (-21% of EBITDA). Re-investment in the business amounted to -$55.7 million (-17% of EBITDA). On a net basis, debt investors pulled out -$15.3 million (-5% of EBITDA) while equity investors furnished +$18.0 million (+5% of EBITDA).
Photronics’ Non-operating Income, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by an opposite trend for the Photronics Peer Group. In most years, Photronics was in the top quartile and third quartile. Currently, Photronics is below median at -17% of EBITDA (-$56.8 million).
Photronics’ Cash Taxes, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Photronics Peer Group. In most years, Photronics was in the top quartile and third quartile. Currently, Photronics is substantially below median at -21% of EBITDA (-$70.3 million).
Photronics’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Photronics Peer Group. In most years, Photronics was in the lower quartile and top quartile. Currently, Photronics is upper quartile at -17% of EBITDA (-$55.7 million).
Photronics’ Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Photronics Peer Group. In most years, Photronics was in the lower quartile and second quartile. Currently, Photronics is lower quartile at -5% of EBITDA (-$15.3 million).
Photronics’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Photronics Peer Group. In most years, Photronics was in the third quartile and second quartile. Currently, Photronics is upper quartile at +5% of EBITDA (+$18.0 million).
Photronics’ Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Photronics Peer Group. (Since 2021 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Photronics was in the top quartile and second quartile. Currently, Photronics is at the upper quartile at +46% of EBITDA (+$153.7 million).
Photronics’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Photronics Peer Group as well. (Since 2019 Cash, %Revenue has experienced sharp improvement.) In most years, Photronics was in the top quartile. Currently, Photronics is upper quartile at +57%.
PROFITABILITY
Photronics’ return on equity has improved very significantly since 2014. The current level of 12.9% is 3.11X the low for the period and is -9.9% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return offset by strong negative trend in non-operating factors.
The productivity of Photronics’ assets rose over the full period 2014-2023: asset turnover has enjoyed a strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a very strong overall uptrend that accelerated very sharply from the 2019 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Photronics’ return on equity is at the upper quartile (12.9%) for the four quarters ended October, 2023.
Operating performance (pretax return on assets) is upper quartile (17.7%) reflecting asset turnover that is upper quartile (0.58X) and upper quartile pretax margin (30.3%).
Tax “keep” rate (income tax management) is lower quartile (46.5%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (1.57X).
GROWTH RATES
There are no significant differences between Photronics’ longer term growth and growth in recent years.
Photronics’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 8.6% per year.
Total asset growth has been 5.6% per year.
Annual E.P.S. growth has been 19.0% per year. (More recently it has been 45.2%.)
Equity growth has been 5.3% per year.
No consensus growth rate forecast is available for Photronics.
Relative to the Photronics Peer Group, Photronics’ historical growth measures are erratic. Revenue growth (8.6%) has been upper quartile. Equity growth (5.3%) has been upper quartile. E.P.S. growth (19.0%) has been above median. Total asset growth (5.6%) has been above median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Photronics’ stock price performance has been volatile and in line with the market. Between April, 2013 and February, 2024, Photronics’ stock price rose +241%; relative to the market, this was a +9% gain.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 61.3% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 61.3% is upper quartile relative to Photronics Inc Peer Group.
Current 5-year total return performance of 22.3% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 22.3% relative to S&P 500 Composite, Photronics’ total return performance is upper quartile relative to Photronics Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, PLAB’s overall valuation is quite low. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/earnings ratio, then by the price/equity ratio, then by the ratio of enterprise value/revenue. The lowest factor, ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Relative to Photronics Peer Group, PLAB’s overall valuation is low. The highest factor, the price/equity ratio, is slightly above median. Ratio of enterprise value/assets is at median. Ratio of enterprise value/revenue is near the lower quartile. Price/earnings ratio is at the lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
Photronics has a large value gap compared to the median valuation. For PLAB to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.92X to 2.13X. If PLAB’s ratio of enterprise value/revenue were to rise to 2.13X, its stock price would be lower by $3 to $30.
For PLAB to hit lower quartile valuation relative to the Photronics Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.92X to 1.85X. If PLAB’s ratio of enterprise value/revenue were to fall to 1.85X, its stock price would decline by $-1 from the current level of $27.
VALUE TARGETS
PLAB is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Photronics’ current Price Target of $49 represents a +81% change from the current price of $26.88.
This neutral appreciation potential results in an appreciation score of 54 (46% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 54, the high Power Rating of 85 results in an Value Trend Rating of B.
Photronics’ current Price Target is $49 (+31% from the 2023 Target of $37 and +81% from the 02/21/24 price of $26.88). This rise in the Target is the result of a +15% increase in the equity base and a +14% increase in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 12.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is well above the 2017 low of 4%.
PTR’s growth forecast is 11.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2018 low of 2%.
PTR’s cost of equity forecast is 8.4% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is above the 2015 low of 3.8%.
At Photronics’ current price of $26.88, investors are placing a positive value of $6 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 10.6% versus a cost of equity of 7.8%.
PTR’s 2025 Price Target of $49 is based on these forecasts and reflects an estimated value of existing assets of $28 and a value of future investments of $21.
Be the first to comment