Photomasks are high-precision quartz plates that contain microscopic images of electronic circuits, and are a key element in the IC and FPD manufacturing process.
Photomasks are widely used in the development of devices for computer and peripherals, as well as products for consumer, automotive, military, biomedical, and medical uses.
Photronics has been a photomask supplier for more than 50 years, giving it a solidly anchored position in the industry and earning it respect from peers and customers. Over half of revenue is generated in Asia, and the company operates 11 manufacturing facilities in Asia, Europe, and North America.
Revenues have grown steadily since 2013 at an overall 6.2% pace, reaching $824.5 million in sales in fiscal 2022. However, growth has been accelerating, and growth since 2019 has averaged 13.8% a year. EPS have experienced a similar turbo-boost since 2019, with average annual growth of 64.7% compared to 14.0% since 2013.
This uptick in the pace of growth has caught our attention, but the market continues to value the stock as if it were growing much more slowly. The annual high and low prices for the stock have not kept up with the fundamental strength of Photronics, a situation that cannot continue indefinitely.
The balance sheet is very strong. Debt is primarily composed of US equipment leases. Total debt was $28 million, or 3.0% of total capitalization. At year-end 2022, long-term debt to equity was 3.8% and trending down. Pre-tax profit margins reached a decade high of 29.0% in fiscal 2022. This value puts it near the very top of the five-year averages of companies in the Semiconductor Equipment & Materials industry group.
Our selection of P/E ratios for Photronics is decidedly conservative, in our view. The current P/E of 12.7 is 91.4% of our adjusted five-average P/E of 13.9, and 82.9% of the average of our high and low P/E ratios.
We have selected a future high P/E of 16.3 and a future low P/E of 11.5, generating a forecast high price of $52 and a forecast low price of $23. This provides the opportunity for more than a doubling of price in the next five years, with a 15.7% annualized rate of return. There may be some uplift from additional margin expansion as the semiconductor cycle turns upward.
The reward-to-risk ratio is 11.6-to-1, well above our minimum standard. The maximum buy price on the stock is $30, but to maintain the reward-to-risk ratio and total return goals shares should be purchased up to $26.