Stock Preacher

Photronics Inc. (Nasdaq: PLAB)

Photronics Inc. (PLAB) is a manufacturer of photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays (FPD), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits and a range of FPDs and, to a lesser extent, other types of electrical and optical components.

The Company sells its photomasks to semiconductor designers, manufacturers, foundries and other high performance electronics manufacturers through its sales personnel and customer service representatives in the United States, Asia and Europe. It primarily sells its products to leading semiconductor and FPD manufacturers, including: Integrated Device Technology Inc., LG Philips LCD Co. Ltd., National Semiconductor Corp., Samsung Electronics Co. Ltd and Texas Instruments Inc.

PLAB operates principally from 10 manufacturing facilities, two of which are located in the United States, three in Europe, two in Taiwan, and one each in Korea, Singapore and China. The Company was founded in 1969 and is headquartered in Brookfield, Connecticut.

Fiscal year 2007 ending October 28, Fiscal year 2008 ending November 2.
the Company recorded $205.4 million impairment charges during fiscal 2008.
Source: Reuters.com, SEC Filings.

Financial Summary

PLAB’s sales for the third quarter fiscal year 2009 were $95.4 million, down 9.7% compared to $105.7 million for the third quarter of fiscal year 2008. Sales of semiconductor photomasks accounted for $71.7 million, or 75.1% of revenues during the third quarter of fiscal 2009, and sales of flat panel display (FPD) photomasks accounted for $23.7 million, or 24.9% of revenues. Net loss for the third quarter of fiscal year 2009 was $22.8 million, or $0.55 loss per share, compared to a net loss of $205.6 million, or $4.93 per share, for the third quarter of fiscal 2008. Excluding the effect of the tax charges of approximately $10.7 million in connection with the Company’s previously disclosed closures of its operations, the Company’s adjusted net loss for the third quarter of fiscal year 2009 was $5.3 million, or $0.13 loss per share.

The Company’s cash and cash equivalents increased to $85.5 million at August 2, 2009, as compared to $83.8 million at November 2, 2008. Cash provided by operating activities was $41.6 million for the nine months ended August 2, 2009, as compared to $65.9 million for the same period last year; the decrease was primarily due to the Company incurring a greater net loss, before consideration of restructuring and impairment charges, as compared to the same prior year period. PLAB’s working capital increased $11.1 million to $77.5 million at August 2, 2009, as compared to $66.4 million at November 2, 2008, primarily as a result of reduced accounts payable and accrued expenses coupled with cash generated from operations. Total debt at August 2, 2009, was $187 million.

For the fourth quarter of 2009, the Company expects revenue in the range of $92 million to $97 million and loss per share, excluding the impact of the charges related to the consolidation charges and exclusive of the potential mark-to-market impact of the recently issued warrants, to be in the range of $0.15 to $0.09. According to Reuters Estimates, analysts on an average are expecting the Company to report loss per share of $0.08 on revenue of $95 million for the fourth quarter of 2009. For the fiscal year 2010, analysts expect revenue of $420 million and EPS of $0.20 per share.

Source: Yahoo! Finance, SEC Filings.

PLAB is trading now at $4.95, up $2.90 or 150% since January 2009. Over the last 52 weeks the stock has ranged from a low of $0.33 to a high of $5.46.

Analyst Consensus

Four analysts polled by Thomson Reuters rate PLAB with “Buy.”

Source: http://markets.ft.com/tearsheets/analysis.asp?s=PLAB%3ANSQ

Investment Highlights

The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of flat panel displays. Photomasks are high precision quartz plates containing microscopic images of electronic circuits, which are used in the manufacture of semiconductors and flat panel displays, as well as used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, and other types of electrical and optical components. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. PLAB has more than 40 patents with ownership interest in the United States.

Due to the severe economic downturn and, as a result, reduced average selling prices and gross margins, the Company ceased the manufacture of photomasks at its Shanghai, China, facility during the third quarter of fiscal 2009. Closing the facility will enable the Company to realize savings of $45 million annually with low revenue impact. Earlier in the year, the Company ceased the manufacture of photomasks at its Manchester, UK, facility. PLAB has also undertaken additional cost saving measures to increase its competitiveness, including reductions in executive and employee salaries, continued hiring freezes, and reductions of other discretionary costs such as outside services, travel and overtime.

At NanoFab, PLAB’s newest and most advanced facility, sales again improved sequentially as the Company continued to ramp production. Qualification in a first production order was achieved with an additional Taiwanese DRAM manufacturer. Three previously qualified customers progressed to volume manufacturing, and five of PLAB’s top 20 customers are now sourcing photomasks from NanoFab.

In September 2009, the Company and Intel Corp. entered into an agreement to work together to share technical and operations information regarding the development status of the Company’s products, the capabilities of the Company’s mask manufacturing lines, and the alignment of the Company and Intel’s mask making toolsets. The agreement also addresses potential for a future relationship relating to business continuity planning for Intel and its affiliates. The agreement has a 10-year term. In consideration for this agreement, the Company issued to Intel Capital Corp. the warrants to purchase up to 750,000 shares of its common stock.

In September, PLAB offered 11,084,337 shares of its common stock at a price of $4.15 per share. The Company also completed the sale of $57.5 million principal amount of its 5.5% convertible senior notes due 2014. The convertible notes will pay interest semi-annually at a rate of 5.5% per annum and will mature on October 1, 2014, unless earlier purchased or converted. The notes are convertible into shares of Photronics common stock at a conversion rate of 196.7052 shares of common stock per $1,000 principal amount of convertible notes, equivalent to a conversion price of approximately $5.08 per share of common stock. The Company received total net proceeds from both offerings of approximately $98 million after deducting fees and offering expenses, and will use the net proceeds to repay a portion of outstanding bank borrowings.

Semiconductor manufacturing equipment billings reached $2.69 billion in the second quarter of 2009. The billings figure is 13% lower than the first quarter of 2009 and 66% less than the same quarter a year ago. Earlier this year, equipment bookings fell to levels last reported in the early 1990s. Since then, bookings increased for five months in a row as market conditions recover. In 2009, the chip industry will see back-to-back yearly declines for the first time in its history, with global chip revenue expected to decline 16.3%, to $219.2 billion, hit by the sweeping economic downturn. The semiconductor industry is expected to bounce back in 2010 and 2011, with worldwide semiconductor revenue reaching $251.2 billion in 2010, a 14.6% increase from 2009, and in 2011 revenue reaching $274.9 billion, a 9.4% increase from the previous year.

According to SRI Consulting, in 10 years flat panel displays (FPD) are expected to have 98% of the large and growing electronic display market worldwide, valued at more than $80 billion in 2008. Liquid crystal displays (LCD) have over 80% of the FPD market today and will remain the leader for the next 10 years. SRIC data show that LCD panels established an early lead among FPD and remain dominant with a 77% share this year on a visual area basis. Over the next five years, LCDs are expected to grow from 39 million to 84 million square meters of visual area, or an average of 17% annually.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

PLAB is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

The MACD for the Company currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

PLAB is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

Continued unfavorable changes in global economic conditions, including those in Asia and the U.S. in which the Company does business, reduced the demand for photomasks and, respectively, reduced the Company’s selling prices and gross margin. Despite these challenges, PLAB is well managed and has made significant progress over the last few quarters in reducing its operating costs, stabilizing its financial situation, while expanding and growing its emerging segments.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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