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Photronics: Near-Term Upside Catalysts

Mar. 09, 2021 10:11 AM ETPhotronics, Inc. (PLAB) Stock11 Comments


  • Photronics, Inc., recently downgraded by a sell side analyst after the release of F1Q21 earnings, has significant near-term upside.
  • In the earnings release, Photronics issued its highest-ever quarterly guidance ranges for both revenues and EPS.
  • Management's explanatory and optimistic conference call comments, combined with a backdrop of historically conservative guidance, lends confidence to the likelihood of near-term execution.
  • Bottom Line: May earnings release should easily beat comps, with management reaffirming further sequential growth. With investors then looking to 2H21, undervaluation will be obvious.

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In an otherwise overvalued market, Photronics (NASDAQ:PLAB) is a deep value stock with good near-term growth prospects. After the release of F1Q21 earnings, the stock received an analyst downgrade and subsequently traded down. I believe that upcoming 2Q21 earnings, coupled with likely management guidance and commentary, will be a trigger for broader market interest and upward price revaluation. If so, new purchases now will likely be rewarded before Summer.

Photronics manufactures photomasks, used by its customers in the production of integrated circuit (IC) chips and flat panel displays (FPDs) such as television and cell phone screens. Note that this article is not intended to provide an introduction to readers new to Photronics, but rather to provide a basis for believing in the likelihood of a near-term upside. For those who want more company background, I highly recommend the company's Virtual Analyst and Investor Day presentation from December 2020 and Paul Franke's recent article "The Bottom Fishing Club: Photronics."

Photronics is Downgraded

On February 24, Photronics reported fiscal 1Q21 earnings. Revenues and EPS both exceeded mid-range guidance, but both were down sequentially and yoy for understandable reasons, to be discussed below.

The next morning, the stock was downgraded by Stifel from Buy to Hold with a $13 price target, stating, "Near term, we do not see any new catalysts for the name."

I disagree. Instead, I believe that there will be renewed optimism regarding the company post-F2Q21 earnings release in late May. If management simply executes on its near-term guidance, and then reiterates current expectations for the remainder

This article was written by

Investment professional with background in high yield fixed income, equity, investor relations, and corporate finance. Holder of CFA designation. Value orientation. Simple options strategies. Focus on valuation; reconciliation of financial statements; with a general medium term time frame.

Analyst’s Disclosure: I am/we are 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.

I am long PLAB by way of both stock and options.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

Lowcountry Nest Egg profile picture
Yesterday's negative market reaction to overwhelmingly positive results, guidance, and conference call comments was a mystery. I may write a follow-up article.

The only serious question mark is the jump in capital spending, which looks to be putting a short-term damper on free cash flows. The question is whether it is a one-off, or recurring.
Paul Franke profile picture
@Lowcountry Nest Egg I think management stepped in and repurchased shares yesterday afternoon. Buying around BV, with 20%+ future income growth expected on a 15x PE for this year was an easy decision (vs. cash earning next to nothing). I thought about buying more near the lows, but already own enough.
Lowcountry Nest Egg profile picture
@Paul Franke In spite of having a full position, I did buy more. I couldn't stop myself.
Agreed with analysis. I am loading up with their stock before 5/25 earnings call. Their product is in high demand, I had to go through a long wait time to get a photo mask for even a 130nm node!
@dukkipat is the earnings date confirmed?
DS145 profile picture
28 Apr. 2021
Good writeup, solid but conservative company stuck in the doldrums. Hopeful next earnings call delivers and injects some life into the 2021 year to go outlook and beyond.
TLCVI profile picture
15 Mar. 2021
Possible Points for PLAB’s Approximate 8,400 Stockholders to Raise with Management:
1. Despite the independent registered public accounting firm’s material weakness identification, do Management otherwise expect the SEC filings and reports to be fair financial representations of the Company’s situation?
2. The Company’s ‘Income before the income tax provisions consists of the following’ has shown that the Company’s US operations have been losing money since fiscal 2017. How is the Company addressing this i.e., how long until the US segment of the Company is either made profitable again or disposed of?
3. Considering the amendment in the Company’s credit facility, can cash dividends on the common shares be expected in the upcoming years, and if not why was this then amended?
4. “The Company also recorded a gain on acquisition of $16.4 million in the three month period ended May 4, 2014, in accordance with ASC 805 using the acquisition method of accounting” [13]. Was this gain really justified?
5. The Company has said “in January 2016 the Company sold a minority interest investment in a foreign entity and recognized a gain of $8.8 million” [13]. Can more information on this entity be provided?
6. The Company has referenced “the acquisition of a business of $5.4 million in fiscal 2017” [11]. Can more information on this entity be provided?
7. Why did the Company decide to exit their joint venture with Micron?
8. What constitutes the ‘other’ component in the ‘Changes in Accumulated Other Comprehensive Income by Component’ note?
9. What are all of the other assets included in ‘other assets’ and ‘other current assets’?
10. Can the Company provide actual fixed estimated useful lives of their assets as opposed to ranges?
11. The Company says they rely on a limited number of equipment and raw material suppliers but have given no indication of the relative percentages. Can a full breakdown of these be provided?
12. Why have such a large number of shares been authorised?
13. Why is it that number of shares of common stock on the balance sheet of the 10-K filing’s balance sheet and the number at the beginning of the DEF 14A statements are frequently different?
14. In fiscal 2015, was the issue of the 3.25% convertible notes split in half, with one half repaid and the other half extended? If so why?
15. Does the Company have any insurance policies covering their assets?
16. Can the Company provide more information on the ‘Government Grants’ they have been receiving?
17. The Company has mentioned several governmental policy changes concerning the U.S. Department of Commerce, Bureau of Industry and Security, and U.S. administration for instance. Can PLAB provide more concise explanations of how these have directly affected their monetary operations, if this has been the case?
18. Where did the ‘Operating Loss Carryforwards’ come from?
19. Can more information be provided on the five-year tax holiday granted in Taiwan, and why it expired unused in 2017?
20. The Company has referenced “the recognition in 2016 of $4.3 million, compared with $1.5 million in 2015, of previously unrecognized deferred tax assets which primarily resulted from the improved performance of the Company’s FPD operations; the reversal of previously recognized tax expense of $2.4 million that was eliminated by a distribution of the 2015 earnings of a foreign subsidiary to its foreign parent; and a higher percentage of income before income taxes, including an $8.8 million gain on the sale of an investment in 2016, generated in jurisdictions where the company previously incurred losses that, due to valuation allowances, did not result in the Company recognizing tax benefits” [13]. What was the exact cause behind all of these changes?
21. What constitutes a ‘change in control’?
22. Why is the Compensation Committee so small and why do they constantly take advice, recommendations, or suggestions (however you choose to word it) from non-independent parties?
23. What are ‘All Other Fees’ which represent “aggregate fees for products and services other than audit fees, audit related fees and tax fees” [4, 6]? Can the Company elaborate on these?
24. Why is it that “Mr. Macricostas previously served as Chief Executive Officer of the Company on three different occasions from 1974 until August 1997, from February 2004 to June 2005 and from April 2009 until May 2015” [12]? What was the reason behind the constant changes at this EO level?
25. “In 2019, the Company announced the adoption of a new retirement policy that stipulates each independent, non-employee director cannot be nominated for a term that begins after his or her 75th birthday. Consistent with this policy, Joseph Fiorita will retire from the board of directors at the end of his current term and will not stand for reelection at the 2020 annual meeting. On December 13, 2019, the Company announced that Dr. Hsia will retire from the Board of Directors effective as of the Company's 2020 Shareholders Meeting” [6]. Why does this only apply to independent directors?
26. Did the Board recently reduce the number of Committees? If so, why?
27. Why have so many performance metrics been used in the determination of Management compensation if only 2 require satisfying?
28. The Compensation Committee has said that “participants have five years to achieve their designated ownership level” [4, 6, 8, 10, 12, 14]. What happens if this not achieved in time?
10 Mar. 2021
Excellent wrote up! I have been long here as well. Just being patient.
Paul Franke profile picture
Thanks for the shout out!

Could be your terrific article moved the stock today.
Lowcountry Nest Egg profile picture
@Paul Franke Thanks for reading and for your article.
Totally agree with you. Need to dig inside next quarter revenues share in China. This is real trigger imho
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