Photronics: When It's Good, It's Great

• Price: $7.75
• Forward P/E: 9.2
• Earnings Growth: 113%
• Projected Sales Growth: 21.6%
• Market Cap: $453.53 million

Why It's Featured:

Strong demand for integrated circuits and flat panel display photomasks. Danger Zones:

Extreme volatility in earnings (and stock price). Photronics PLAB engages in the manufacture and sale of photomasks primarily in the United States, Europe, and Asia. Photomasks are high precision photographic quartz plates containing microscopic images of electronic circuits, which are used in the manufacture of semiconductors and flat panel displays; and used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, various flat panel displays, and other types of electrical and optical components. The company sells to semiconductor designers, manufacturers, foundries, and other high performance electronics manufacturers through its sales personnel and customer service representatives. Photronics, Inc. was founded in 1969 and is headquartered in Brookfield, Connecticut. Back in 2008 PLAB hit a low of 30 cents. Then it rebounded and more than doubled in the last 2 years. It recently hit $10.15, set on March 4, 2011. Is this a temporary set back or something more? Here's what we know. Earnings took a beating in 2008 and 2009, registering a negative 27 cents, then minus 63 cents. But in 2010, they came back with a vengeance, finishing the year with a positive 38 cents. This year (fiscal year ends October 31), 5 analysts have a consensus estimate of 81 cents (with a range of 74 cents to 85 cents). Next year, they're expecting 84 cents (with a range of 55 cents to $1.05...that's quite a range...reflects the volatility of this sector). If next year's finish is as strong as $1.05, there's no question this stock is set to do better. If it's the lower end, this stock will be the victim of gravity (and selling). Analysts are generally positive about sales in integrated circuits and flat-panel display photomasks. They see increases for the next several quarters. Revenues should go from $425.6 million at PLAB in 2010, to $517 million this year, then $548 million next year. That's an increase of 21.6% in 2011 and 5.9% for 2012. It's the high-end products that give the company the best margins. With the global economy slowly crawling out of recession, expect more sales in large screen TV's along with new tablets and smartphones coming to market with larger screens. Also look for more demand from Asia, particularly China where the company has manufacturing plants (located in Taichung, Taiwan). There's also a plant in Cheonan, Korea. Management recently bought back $5 million of its 5.5% Convertible senior notes. It paid in cash and common stock. There is now $22.1 million of the convert outstanding. It had previously acquired $30.4 million of the convert. Interest savings on the new purchase will be $275,000 a year. It also restructured other debt obligations giving it more cash to expand operations and increase R & D. The annual Semicon West trade show is going on this week. There will be news analysts will dissect to determine the state of the industry. Many are starting to turn a little bearish as economic data isn't reinforcing a bullish case for spending. Watch for news on PLAB as well as other semiconductor related stocks in the next few days. Essential numbers:

• Price to sales ratio is .95.
• Price to book is .91.
• Profit margin for the last 12 months was 2.42% and Operating margin was 12.6%.
• Return on equity was 2.84% and Return on assets was 4.83%.
• There's $186.11 million in cash for $3.17 a share.
• Total debt is $165.38 million.
• Total debt to equity is 29.93%.
• Current ratio is 2.28.
• Book value per share is 8.47.
• Beta is an extreme 3.51 (can you say volatility?).
• In the last 52 weeks, the stock is up 59.83%.
• There are 58.78 million shares outstanding with a Float of 51.53 million.
• Insiders own 4.03% of the stock.
• Institutions have 102.1% of the Float.
• There is no dividend.

Here's the scoop on the electronics industry: when it's great, it's great. But it turns quickly and when it goes bad, it's awful. That's why the stock went from $27.30 in 2005 to 30 cents in 2008. Keep that in mind as you research PLAB. Right now, things are great. Orders are pouring in from all over the globe. Demand looks solid for at least a few more quarters. The question is: how many quarters? - Company Web site: www.photronics.com - Ted Allrich July 14, 2011

Ted is the Chairman of the Board of B of I Holding and Bank of Internet USA. He is also the founder of The Online Investor (www.theonlineinvestor.com) which has a Free Newsletter for investors.