Photronics: Time To Get Back In
Summary
- The stock has stalled after a big run, even though earnings growth is strong as ever thanks to an expansion that has legs to it.
- The chart patterns reveal a certain level of resilience in PLAB despite all the recent headwinds, which bodes well going forward considering the circumstances.
- PLAB is still relatively inexpensive with multiples where they are, especially considering the amount of ground covered in the last 12 months.
- There are risks out there and patience may be needed, but long PLAB is worth it all things considered.
Oleh Stefaniak/iStock via Getty Images
Photronics (NASDAQ:PLAB) has see-sawed in 2022. The stock has gone up and down this year after a furious rally towards the end of last year, which may have led some to the sidelines. However, the stock has now cooled off, which might not be such a bad thing after the tremendous run it had. Furthermore, if fundamentals, valuations and charts are any indication, it may be time to get back in. Why will be covered next.
PLAB is showing strength underneath
The tech sector has struggled in 2022, so it’s no surprise for PLAB to get dragged along as a manufacturer of integrated circuit or IC and flat panel display or FPD photomasks. The stock is down 6.8% YTD in 2022. However, the recent decline in the stock comes after a year in which it appreciated by 68.9%, much of it coming in the last month of 2021.
Some consolidation after such a big move was warranted. The chart below shows how PLAB has gone sideways in 2022 after soaring higher towards the end of 2021. However, the general direction of the stock still seems to be pointing up. Declines are temporary and it appears the stock wants to move up based on the chart patterns.
Source: finfiz.com
Moreover, it’s worth noting that PLAB has actually outperformed compared to other semis and tech stocks in general. For instance, the iShares PHLX Semiconductor ETF (SOXX) has lost 12.7% YTD and the Invesco QQQ trust (QQQ) has lost 12% YTD. PLAB has done better in comparison. This outperformance could be seen as a sign of underlying strength, a bullish signal for PLAB.
The stock did not get hit as hard as some other stocks and it was quicker to get back on its feet. The stock was even able to fully recover from its losses at one point. The price action points to a level of resilience in PLAB that could come in handy in a market environment that has seen volatility rise for a number of reasons.
Why PLAB did not fall as much as other stocks
The resilience of PLAB is due to a couple of reasons. Unlike other high-flying tech stocks that got hit hard, PLAB never got to the point of trading at lofty valuations. The table below shows the multiples for PLAB. For instance, PLAB has an enterprise value of $1.07B, which is equal to 5.23 times EBITDA on a trailing basis and 4.06 times EBITDA on a forward basis.
The balance sheet is healthy and the stock is valued at just 1.27 times book value. All numbers that are much lower than the sector median. PLAB is relatively cheap, especially for a stock that is not that far removed from its 52-week high, having gained 44.2% in the last 12 months.
PLAB | |
Market cap | $1.08B |
Enterprise value | $1.07B |
Revenue (“ttm”) | $701.5M |
EBITDA | $204.9M |
Trailing P/E | 15.39 |
Forward P/E | 11.76 |
PEG ratio | 0.12 |
P/S | 1.52 |
P/B | 1.27 |
EV/sales | 1.53 |
Trailing EV/EBITDA | 5.23 |
Forward EV/EBITDA | 4.06 |
Source: SeekingAlpha
Why PLAB has reason to be bullish
Multiples could go lower if the stock keeps doing what it has been doing, which is going sideways even though the company is growing at a rapid pace. Q1 FY2022 revenue, for instance, increased by 24.8% YoY to $189.8M, the fourth consecutive quarter with revenue setting a new record. Net income attributable to shareholders was $23M or $0.38 per share, an increase of 192% YoY.
Note that PLAB spent $3M on stock buybacks in Q1 FY2022, $10M less than in Q4 FY2021 and Q1 FY2021, which makes earnings growth even more impressive. Margins soared higher thanks to top-line growth, but also due to price adjustments. If the Q1 FY2022 numbers are any indication, then FY2022 is gearing up to be the fifth consecutive year of record revenue. The table below shows the numbers for Q1 FY2022.
(GAAP) | Q1 FY2022 | Q4 FY2021 | Q1 FY2021 | QoQ | YoY |
Revenue | $189.827M | $181.288M | $152.067M | 4.71% | 24.83% |
Gross margin | 31.5% | 28.7% | 20.1% | 280bps | 1440bps |
Operating margin | 20.1% | 18.5% | 7.7% | 160bps | 1240bps |
Operating income | $38.197M | $33.519M | $11.766M | 13.96% | 224.64% |
Net income attributable to Photronics shareholders | $23.064M | $19.811M | $8.036M | 16.42% | 187.01% |
EPS | $0.38 | $0.33 | $0.13 | 15.15% | 192.31% |
Source: PLAB Form 8-K
The table below breaks down revenue by segment. Revenue from IC photomask and FPD photomask were both record highs at $129.8M and $60.1M respectively.
Q1 FY2022 | Q4 FY2021 | Q1 FY2021 | QoQ | YoY | |
IC photomask | |||||
High-end | $46.5M | $42.6M | $36.8M | 9% | 27% |
Mainstream | $83.2M | $82.9M | $68.2M | 1% | 22% |
$129.8M | $125.4M | $105.0M | 3% | 24% | |
FPD photomask | |||||
High-end | $46.3M | $41.0M | $34.6M | 13% | 34% |
Mainstream | $13.8M | $14.9M | $12.5M | (7%) | 11% |
$60.1M | $55.8M | $47.1M | 8% | 27% |
Guidance calls for Q2 FY2022 revenue of $188-196M, an increase of 20.2% YoY at the midpoint. The forecast expects EPS of $0.32-0.38, an increase of 105.9% YoY at the midpoint.
(GAAP) | Q2 FY2022 (guidance) | Q2 FY2021 | YoY (midpoint) |
Revenue | $188-196M | $159.8M | 20.15% |
Operating margin | 20-22% | 13.0% | 800bps |
EPS | $0.32-0.38 | $0.17 | 105.88% |
PLAB has new financial goals
In addition, management updated its long-term target model. The old model from 2020 called for gross margins in the mid to high 20s and operating margin in the mid to high teens, which represent prior peaks. PLAB has surpassed those targets with its Q1 report, which means new targets are needed. The new model targets revenue of $850M, gross margin of 34-36%, operating margin of 24-25% and EPS of $1.90-2.00. From the Q1 earnings call:
“So for our new long-term model, we see gross margins reaching the mid-30s and operating margin in the mid-20s. This improvement in profitability should produce higher cash flows and EPS, including earnings approaching $2 per share and free cash flow of $200 million annually, elevating the financial profile of our business and ultimately creating greater value for our shareholders.”
A transcript of the Q1 FY2022 earnings call can be found here.
While guidance was limited to Q2, PLAB did add some color as to what FY2022 is shaping up to be like.
“We're seeing an acceleration of the trends that drove and achieved record performance in 2021 and are confident that 2022 will be even better for Photronics, our customers, our employees and our shareholders.”
Last year was a good one for PLAB and if management is right, then this year will be even better.
PLAB is not perfect
PLAB has a lot going for it, but it’s not without flaws. The table below breaks down revenue by geographic area. While PLAB is active in several markets, much of PLAB’s recent growth is driven by China. Revenue in that market grew by 19.9% QoQ and 118.9% YoY, surpassing all other markets.
Q1 FY2022 revenue | QoQ change | YoY change | |
Taiwan | $67.8M | (1.9%) | 19.9% |
China | $46.0M | 19.9% | 118.9% |
Korea | $39.5M | 4.6% | 1.9% |
USA | $27.2M | 2.3% | 2.1% |
Europe | $8.9M | (0.7%) | 3.9% |
Other | $0.4 | (4.5%) | (17.4%) |
$189.8M | 4.7% | 24.8% |
Source: PLAB Form 10-Q
This can be seen as both a good thing and as a bad thing. On the one hand, the numbers show that PLAB made the right call with regard to China. Recall that PLAB decided several years ago to focus on China, which required heavy investments. Lots of spending affected profitability in past quarters, but PLAB is now reaping the fruits of its labor and the strong growth is proof of it.
On the other hand, PLAB has become very reliant on China for growth, which may not be such a good thing. If something were to happen in China, PLAB stands to be impacted greatly. This could happen if the U.S. government imposes trade sanctions on China, causing growth to drop. Other markets are not expanding as fast, which means PLAB will be hard-pressed to keep growing if China falters for whatever reason. This may become a problem for PLAB in the future.
Investor takeaways
A previous article concluded that the time had come for long PLAB with the way fundamentals, valuations and charts were all set up, even though the stock was struggling at the time. For instance, the stock was trading below book value, which some people consider to be a sign of an undervalued stock. Betting on PLAB turned out to be a wise move at the time with the stock having appreciated by roughly a third, even with the recent pullback in the stock.
The stock soared higher in December thanks to an outstanding Q4 report, which validated the bull case for PLAB. Yet an update to the previous article cautioned that the time had come to lock in profits after the rally and with headwinds gathering strength. As it happened, the stock did go on to correct, caught in the market turmoil triggered primarily by a hawkish Fed and war in Europe.
These headwinds remain out there. In addition, PLAB still faces the possibility of having its access to China curtailed because of trade sanctions. As shown previously, China makes up an increasingly larger proportion of PLAB’s sales. Losing access to its fastest growing market would definitely impact PLAB and not in a good way.
PLAB is not without risks. The stock market has become a tougher environment in 2022 compared to say 2021. Given today's environment, it would not be unusual for people to pass on the opportunity to bet on PLAB, no matter how much it has going for it. People may simply choose to be contend with what they got after the late rally due to the prevailing uncertainty in the market and the risks associated with that.
I am bullish PLAB nonetheless. There are risks, but PLAB has managed to handle them well considering the circumstances. PLAB’s ability to remain resilient in the face of adversity is a good sign with headwinds not expected to go away anytime soon. Earnings growth remains strong with EPS coming close to tripling in the most recent earnings report.
Market demand remains elevated in both the semiconductor and mobile display industries. PLAB remains relatively inexpensive with multiples where they are. PLAB looks like a company that is in the early innings of an expansion that has legs to it, as indicated by the latest financial model from PLAB. PLAB is not a bet without risks and it may take a while before there’s a reward, but it’s a bet worth taking.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of PLAB either through stock ownership, options, or other derivatives. 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.