Seeking Alpha
, Portfolio123 (2,710 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

Although Photronics Inc.'s (NASDAQ:PLAB) stock price has risen 46.6% since the beginning of 2013, it is still an excellent buy right now. This compared to 29.2% rise of the S&P 500 index, and 38.3% rise of the Nasdaq Composite Index at the same period. In this article, I will show why, in my opinion, Photronics stock is a remarkably promising long term investment.

The Company

Photronics, Inc. is one of the world's leading manufacturers of photomasks. The company sells and markets its products to semiconductor designers, manufacturers, and foundries, as well as to other high performance electronics manufacturers primarily through its sales personnel and customer service representatives. The Company currently operates principally from eight manufacturing facilities; two of which are located in Europe, two in Taiwan, one in Korea and three in the United States. Photronics, Inc. was founded in 1969 and is headquartered in Brookfield, Connecticut.


Photomasks are a key element in the manufacture of semiconductors and flat panel displays (FPDs), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits (NYSE:ICS) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components.

In contrast to the broad semiconductor equipment industry where higher global chip production is the key to growth, new designs are the main factors driving growth for photomasks producers since new designs require new photomasks.

The Industry

Semiconductor and semiconductor equipment manufacturers have historically been highly cyclical, with periods of strong growth and high margins, which have caused companies to raise capital investment, and in effect have caused excess supply followed by periods of weakness. The economic data and companies' comments are all saying essentially the same thing, which is that the semiconductor equipment industry has already passed through the bottom of the current cycle. New internet applications will extend the compute environment to every day devices like smart television, wearable, cars, light bulbs and more. This development will increase the demand for semiconductor test equipment.

Book-to-Bill Ratio

One very important parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. On December 19, 2013 the SEMI.ORG announced that the North American semiconductor equipment industry posted November 2013 book-to-bill Ratio of 1.11. On that occasion, Denny McGuirk, president and CEO of SEMI said:

The continuing rise in equipment bookings clearly points to year-end order activity that is substantially stronger compared to one year ago. This trend supports the current outlook showing a rebound in equipment spending for 2014.

The table below presents the North American semiconductor equipment industry's billings, bookings and the book-to-bill Ratio since the beginning of 2012.

(click to enlarge)

Source: SEMI.ORG

The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.

(click to enlarge)

The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.

(click to enlarge)

Valuation Metrics

The table below presents the valuation metrics of Photronics, the data were taken from Yahoo Finance and

Photronics' valuation metrics are quite good; the company has a low debt, the forward P/E is very low at 10.66, and the average annual earnings growth estimates is quite high at 11% which give a low PEG ratio of 0.97 (forward P/E divided by growth). Furthermore, the stock is trading way below book value.

Many analysts of the semiconductors industry give a high importance to the price-to-sales ratio, and consider it a better indicator than the P/E ratio for companies in this industry. Comparing the current price-to-sales ratio to its historical values can give a fair idea if the stock is cheap or too expensive right now. In the case of Photronics, the actual ratio is not historically too high as shown in the chart below (the small difference in value between the chart and the table is due to delayed updating of the chart).

(click to enlarge)

Latest Quarter Results

On December 10, 2013, Photronics reported its fourth-quarter fiscal 2013 financial results.

Fourth Quarter Highlights

  • Quarterly sales of $106 million; within revised guidance of $105 - $106 million
  • Quarterly Non-GAAP diluted EPS of $0.09; exceeds revised guidance of $0.06 - $0.07
  • Quarterly Non-GAAP EBITDA of $27 million
  • Quarterly high-end FPD sales increase 11% sequentially to $18 million
  • Working capital increases $22 million sequentially to $214 million
  • Net cash of $22 million up $18 million sequentially

In the report, Constantine Macricostas, Photronics' chairman and chief executive officer, commented:

Photronics' fourth-quarter revenues reflect reduced high-end IC photomask sales, which were affected by decreased demand in memory photomasks due to customer delays in transitioning to new nodes and a delay in fully completing the qualification process with a key Asian foundry customer. Even with softer revenues, we delivered on the bottom line and achieved non-GAAP net income of $0.09 per diluted share, which exceeded our revised guidance range. Our business model is strong and when we complete our current qualifications and our customers' transition to new nodes we expect robust top- and bottom-line growth.

Following the fourth quarter we entered into an agreement with Dai Nippon Printing Co. Ltd. (NYSE:DNP) to form a joint venture in Taiwan, adding significant high-end IC growth opportunities and increased capital efficiency. This transaction accelerates our strategy and our progress towards establishing a strong industry leadership position.

Competitors and Group Comparison

According to Photronics, the photomask industry is highly competitive and most of the Company's customers utilize multiple photomask suppliers. The Company estimates that, for the types of photomasks it manufactures (IC and FPD), the size of the total market (captive and merchant) is approximately $3.7 billion. Its competitors include Compugraphics, Inc., Dai Nippon Printing Co. (OTC:DNPCF), Hoya Corporation, SK-ElectronicsCo. Ltd., Taiwan Mask Corporation and Toppan Printing Co., Ltd. The Company also competes with semiconductor manufacturers' captive photomask manufacturing operations that supply photomasks for internal use and, in some instances, also for external customers and foundries.

A comparison of key fundamental data between Photronics and its much bigger competitor Dai Nippon Printing is shown in the table below. In addition, fundamental metrics for three other small cap semiconductor equipment companies; ATMI Inc. (NASDAQ:ATMI), Ultratech, Inc. (NASDAQ:UTEK) and Brooks Automation, Inc. (NASDAQ:BRKS) are shown in the table.

(click to enlarge)

Source: Yahoo Finance

Photronics valuation metrics are better than the three other small cap semiconductor equipment companies. It is difficult to compare the valuation metrics with its much bigger competitor Dai Nippon Printing of Japan because growth estimate data are not available for the latter.

Most of Photronics' valuation parameters have been better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

(click to enlarge)

Source: Portfolio123

Technical Analysis

Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders, my analysis is only for investors). The charts below give some technical analysis information.

(click to enlarge)


The PLAB stock price is 2.43% above its 50-day simple moving average and 10.24% above its 200-day simple moving average. That indicates a mid-term and a long-term uptrend.

(click to enlarge)

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.019, which is a bit bullish (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 58.54 which do not indicate oversold or overbought conditions.

Analyst Opinion

Most analysts recommend the stock. Among the five analysts covering the stock, two rate it as a strong buy, two rate it as a buy, but one analyst rates it as an underperform.

Pending Merger of PSMC with DNP Photomask Technology Taiwan Co., LTD.

On November 20, 2013, Photronics announced that it had entered into an agreement to merge Photronics Semiconductor Mask Corporation (PSMC), its Taiwanese IC subsidiary, with DNP Photomask Technology Taiwan Co., Ltd., a wholly owned subsidiary of Dai Nippon Printing Co., Ltd. , to form a joint venture which will operate under the name of Photronics DNP Mask Corporation (PDMC). The pending merger, which is a noncash transaction, would result in the Company owning 50.01% and DNP owning 49.99% of PDMC, whose financial results would be included in the Company's consolidated financial statements. The merger is subject to regulatory approvals and customary closing conditions, and is expected to be finalized during the first half of fiscal 2014.


In my opinion, Photronics will outperform the worldwide wafer fab equipment (WFE) in 2014. According to SEMI.ORG, in its publication of December 03, 2013, worldwide sales of new semiconductor manufacturing equipment will increase in 2014 by 23.2% to $39.46 billion. Photronics is poised to benefit from rising capital intensity to be driven by the advancement of integrated circuit designs to nodes of 45 nanometers and below, and the transition by flat panel display makers to G8 and above technologies. Since new designs are the main factors driving growth in the demand for Photronics' photomasks, the company will take advantage of new internet applications which will extend the computing environment to everyday devices like smart television, wearable, cars, light bulbs and more. Furthermore, the tablets and the smartphones revolution will continue to need a lot of new designs.

I consider the pending merger of PSMC with DNP, in an all-stock transaction, which is expected to be finalized during the first half of fiscal 2014., very positive to the company. According to Photronics, the new merger is expected to accelerate Photronics growth in both high-end and mainstream markets in Taiwan and Asia region. Taiwan is the world biggest market for semiconductor equipment with expected 2014 sales of $10.99 billion, South Korea comes next with expected 2014 sales of $7.60 billion, China with $4.11 billion and Japan with $4.08 billion are in the third and fourth place. In total, the Asia region is responsible for about 68% of the global demand for semiconductor equipment. The new merger is expected to leverage DNP's leading logic technology processes and PSMC's advanced memory technology processes and operating scale, and to provide additional mainstream production capacity and to improve high-end tool utilization.


As one of the world's leading manufacturers of photomasks, Photronics will benefit from the rebound in semiconductor manufacturing equipment spending in 2014. Photronics has a strong balance sheet, low debt, and its stock is trading way below book value. The company has compelling valuation metrics and robust earnings growth prospects, its PEG ratio is very low at 0.97. Furthermore, the planned merger with DNP should accelerate Photronics growth in Asia region, the biggest global market for semiconductor equipment. All these factors bring me to the conclusion that PLAB stock is a smart investment right now.

Since one company Samsung Electronics was responsible for approximately 18% of Photronics' net sales in 2013, and its five biggest customers were responsible for approximately 43% of its sales, a significant decrease in the amount of sales to any of these customers could have a material adverse effect on the financial performance and business prospects of the company.

Disclosure: I am long PLAB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Photronics: A Long-Term Buying Opportunity