In the Small Cap Arena, Cash Is King

Written by GSCR Staff   
Wednesday, 21 January 2015 07:56

In yesterday’s Goldman Guide we highlighted some macroeconomic trends and market reactions in what has been a rough January so far.

We believe small cap companies with relatively large amounts of cash on hand will begin share buyback programs this year. There are several candidates we examined but one stood out from the pack.

 

Back in January 2013 we featured Photronics, Inc. (NASDAQ – PLAB - $8.24) in the Market Monitor at $6.06. Last February we thought it was time to get out at $8.18 with a 35% gain in stock price. We were half right and half wrong on this call as the stock has oscillated around $8.50 plus/ minus $0.75. Now maybe the time to hold on or even add here based on themacro premise mentioned above along with a few other key factors.

 

For a refresher, Photronics together with its subsidiaries, manufactures and sells photomasks in the United States. Photomasks are high precision photographic quartz plates containing microscopic images of electronic circuits. The Company offers photomasks for the use in the manufacture of semiconductors and flat panel displays (FPDs), as well as for use as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits, FPDs, and other types of electrical and optical components. The Company sells and markets its products to semiconductor designers, manufacturers, and foundries, as well as to other high performance electronics manufacturers.

 

Photronics has over $192 million in cash on hand as of the end of its 2014 FY on November 1, 2014, which translates to nearly $3 per share cash on hand. An operating margin of 7% versus the industry average of 6% also indicates the Company is keeping operating costs under control. Additionally, the Company has total debt of just $142 million and a book value per share of $9.53 which are positive indicators of optimal capital structure.

 

A forward P/E of 13 versus a trailing P/E of 20 on analysts’ estimates of nearly 14% revenue growth to $529 million for FY2015 is a great value sign. A low 5-year PEG ratio of 2 also indicates some longer term growth potential.

 

The tech and semiconductor industry should remain strong in 2015. This event coupled with strong valuation metrics and plenty of cash on hand make PLAB a nice add to your small cap portfolio. The stock could climb to $11 this year once it breaks through the $9.40 resistance level.

 

Have a great day!

 

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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