Shares of semiconductor photomask maker Photronics (PLAB +0.78%) rocketed 48.5% higher in the month of December, according to data from S&P Global Market Intelligence.
Photronics is an interesting small-cap stock within the very large and dynamic semiconductor manufacturing ecosystem, and it's also one of the cheaper stocks one will find in the space. But investors are perhaps sensing the opportunity, bidding shares up nearly 50% in the aftermath of the company's impressive fourth fiscal quarter earnings report last month.
NASDAQ: PLAB
Key Data Points
Defying the semiconductor downturn
The semiconductor sector has experienced a "rolling" downturn over the last few years after the "boom" during the pandemic. First, PCs went into a severe, worst-ever decline in 2022, with smartphone units following on weakness in China. Currently, auto and industrial chips appear to be undergoing a correction as supply chain snarls have been worked out.
But Photronics just finished its fiscal year with its sixth consecutive year of growth. The company had its fourth-quarter earnings release on Dec. 13, which was the catalyst for last month's rally.
In the quarter, revenue remained resilient, growing 8%, with adjusted (non-GAAP) earnings up 19.2% to $0.60 per share. What's even more impressive is that full-year results were also up 8%, following a 24.2% gain in fiscal 2022.
How has Photronics been able to avoid the downturn that struck the overall industry over the past couple years? Well, Photronics, while perhaps not a blockbuster-grower, appears to be less cyclical than the overall semiconductor industry. This is because it produces the photomasks that accompany new chip and flat panel display designs, and is therefore more dependent on new design activity, not the volume of chips produced.
So in any given year, Photronics will likely have some segments doing better than others, which should somewhat balance out. For instance, earlier in the year, the "mainstream" integrated chip segment for photomasks on the 28 nanometer node and higher was stronger, thanks to the resilient growth in auto and industrial designs. However, in the fourth quarter, that business actually declined 4.5%. But the "high-end" segment for leading-edge chips recovered, growing 30.2% year over year, helping to boost the overall IC segment.
Photronics still looks pretty cheap
Even after December's rise, Photronics only trades at 14 times earnings. But the stock is actually even cheaper than that when stripping out the company's excess net cash of $487.6 million, accounting for 27% of the company's market cap! Strip that out, and Photronics' valuation falls to just 10.3.
It's a bit curious that the company trades so cheaply when it hasn't had a revenue decline in six years. One reason could be the lack of a dividend and very minimal repurchase activity, despite the company's great balance sheet. Hopefully, now that almost all the company's debt has been paid off, management will now turn to more shareholder returns.
In any case, value investors with an interest in small-cap stocks should definitely give Photronics a look, even after its December surge.
