Photronics: A Hidden Gem Prone to Profit From AI Development (NASDAQ:PLAB)

It’s no secret that synthetic intelligence [AI] has been the expansion story for the 2020s. The worldwide AI market is anticipated to grow at a robust pace of 37.3% annually to succeed in about $1.7 trillion by the top of 2030. One of many essential elements that makes AI doable is built-in circuits [ICs] (also called semiconductors or microchips). What will not be as well-known is a rising firm that’s prone to profit from AI progress. Photronics (NASDAQ:PLAB) is likely one of the behind-the-scenes firms that makes the manufacturing of semiconductors doable.

I see Photronics as a strong long-term funding because the inventory has a horny valuation and the corporate has robust consensus expected earnings growth of about 13% for FY24.

Photronics manufactures photomasks that are used to provide ICs, flat panel shows [FPDs], and to switch circuit patterns onto microchips. The corporate is experiencing strong demand for its photomasks as report income was achieved for the sixth yr in a row.

Nonetheless, it’s price noting that Photronics said that there’s a present contraction in demand which can final by means of fiscal Q1 2024. Nonetheless, the consensus amongst business leaders and clients is that demand will likely be stronger by the mid-point of 2024 or the corporate’s fiscal Q2 & Q3 2024 as the subsequent progress part begins. The corporate additionally said that photomask demand tends to be much less cyclical than the semiconductor business normally. This offers Photronics some stability in a market that may fluctuate considerably.

Development Catalysts

The marketplace for IC photomasks is approaching $4 billion annually. The whole marketplace for each IC photomasks and FPD photomasks is $7.5 billion. Photronics is a pacesetter on this market with trailing 12 month revenue of $892 million with consensus expectations of $935 million in revenue for FY24 and $1 billion for FY25.

The robust anticipated progress for AI by means of the rest of the last decade is prone to create a pleasant tailwind for Photronics. The corporate is prone to see rising demand for its photomasks for AI-related semiconductors. Photronics’ clients are prone to expertise an growing want for photomasks for producing their AI-related ICs in 2024 and past.

Situations look constructive for robust photomask pricing in 2024. There was a global shortage of photomasks out there, which may put upward strain on costs in 2024. The main photomask producers: Toppan Holdings (OTCPK:TOPPY), Dai Nippon Printing (OTCPK:DNPLY), and Photronics have been working at full capability. Some chip producers have been paying further charges to photomask producers for expedited deliveries. The anticipated enhance in photomask costs ought to have a constructive impression on Photronics’ income in 2024. This must also assist to widen margins and assist the corporate obtain analyst consensus expectations of 13% EPS progress for FY24.

Photronics additionally has excessive working leverage as a low-cost producer. This helped the corporate obtain an operating margin of 28.4% for FY23. This was the best working margin within the firm’s historical past. This was a major enchancment over the working margin of 25.7% from FY22 and 14.3% from 2022. The anticipated enhance in photomask costs driving the corporate’s income may widen the working margin additional in FY24.

Photronics achieves robust profitability metrics to drive its earnings progress.

We are able to see from the chart above that Photronics outperforms the sector median on most of its profitability metrics aside from gross margin [GM]. Regardless of lagging the sector in GM, PLAB’s different margins resembling EBITDA margin and web revenue margin make up for it as the corporate considerably outperforms the sector median. These extensive margins and PLAB’s robust double-digit return on fairness and return on whole capital helps to drive the corporate’s double-digit earnings progress.

Valuation

Photronics is buying and selling attractively at 12.5x expected EPS of $2.30 for FY24. That is considerably beneath the sector median ahead PE of 23x.

Photronics additionally trades beneath its rivals with a ahead EV/EBITDA of 4.5x. Toppan trades with a forward EV/EBITDA of 7x, whereas Dai Nippon Printing trades with a ahead EV/EBITDA of 8. PLAB additionally trades considerably beneath the sector median ahead EV/EBITDA of 14.9x.

PLAB’s inventory has loads of room to maneuver increased from this enticing low valuation.

I additionally cross-checked PLAB’s valuation with a reduced money circulate evaluation. The parameters for the evaluation are included within the desk beneath:

The time interval for the long-term progress price is 5 years. With the present worth at $28.78 and a good worth worth of $39.66 in accordance with the DCF evaluation, Photronics is exhibiting upside of 37.8%.

The DCF evaluation honest worth appears to be like cheap. The 37.8% potential upside for the inventory may be achieved by means of PLAB’s anticipated EPS progress of 13% plus PE a number of enlargement as a result of low valuation. The goal worth of $39.66 would enhance the PE to 17.2x anticipated EPS of $2.30 for FY24. That’s nonetheless decrease than the sector median ahead PE of 23x.

The inventory worth made a major transfer increased after the corporate’s fiscal This autumn 2023 earnings report. Nonetheless, the worth has been pulling again over the previous two weeks. The MACD exhibits the change in development from bullish to bearish because the blue MACD line crossed beneath the crimson sign line. The RSI confirms the change in development because it fell from an overbought situation. This appears to be like like revenue taking after the quick run-up in worth.

Because the firm did not report any unfavorable information, I would not count on the worth to drop a lot additional. I might guess that the worth would possibly drop to about $26 to $27 and switch the highs from July into assist. That may even be about midway down the flag pole of this latest bull flag formation after the final earnings report. I’ve noticed that these kinds of bull flag formations are inclined to cease dropping across the mid-point of the flag pole.

Steadiness Sheet/Money Stream

The balance sheet appears to be like robust as Photronics has $499 million in whole money & equivalents with solely $18 million in long-term debt. The corporate additionally has a class of ‘different liabilities’ of $47 million on the stability sheet. Even the mix of long-term debt plus different liabilities of $65 million remains to be considerably decrease than PLAB’s whole money.

The stability sheet additionally exhibits PLAB with 4.2x extra present property than present liabilities and 6x extra whole property than whole liabilities for whole fairness of $1.3 billion. It’s noteworthy that PLAB has $561 million in retained earnings. Having considerably extra property than liabilities, extra cash than debt, and a excessive quantity of retained earnings demonstrates that PLAB has monetary stability and is in a terrific place for continued progress.

The corporate had $302 million in operating cash flow for FY23. This was a ten% enhance over the working money circulate from FY22 and 2x increased than FY21. PLAB spent $131 million on CapEx and repaid $18.4 million in long-term debt. Solely $1.2 million price of widespread inventory was issued in FY23. The corporate was left with $122.8 million in unlevered free money circulate. PLAB’s robust money circulate additional demonstrates the corporate’s robust monetary place and its skill to develop going ahead.

Dangers for the Firm

The semiconductor business traditionally has been considerably cyclical. The business has massive spikes and dips which might create durations of decrease income and earnings through the dips.

PLAB depends on a restricted variety of massive clients. The corporate’s 5 largest clients comprised 51% of PLAB’s income in FY23. The lack of enterprise from a number of of those clients can have a major unfavorable impression on the corporate’s income.

Backside Line Outlook for Photronics

Photronics appears to be like nice from a valuation and progress standpoint. The inventory’s low valuation leaves loads of room for PE a number of enlargement whereas the corporate grows earnings at a double-digit tempo. The DCF evaluation above exhibits about 38% upside for the inventory, which can be supported by the low valuation and powerful anticipated earnings progress.

The truth that Photronics is working at full capability creates the likelihood for enlargement when it comes to a brand new manufacturing facility. Within the meantime, PLAB is poised to learn from pricing power in 2024 as a result of scarcity of photomasks out there.

Remember the fact that the inventory has been pulling again just lately. New traders might wish to scale in to the inventory or watch for a affirmation of a continuation of the uptrend earlier than leaping in.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please pay attention to the dangers related to these shares.