Deep-Value Investor Donald Smith Adds Shares of Photronics Inc.
Photronics is one of the world’s leading suppliers of reticles and photomasks, components used in the semiconductor and flat panel display industries. In the second quarter ended April 29, 2012, it had revenue of $117.5 million, a 5 percent sequential increase, and a year over year decline from $133.1 million. GAAP net income for the quarter was $8.8 billion, compared to a loss of $16.4 billion the previous year, which included a $30 million debt extinguishment due October 2014. On a non-GAAP basis net income was $14.8 billion in last year’s quarter.
Due to soft demand in previous quarters as a result of overall industry trends, Photronics’ CEO Constantine Macricostas has been focused on maintaining a lean cost structure. In the fourth quarter, they began streamlining their operating infrastructure in Asia by consolidating the manufacture of semiconductor photomasks in Singapore into other Photronics facilities. Therefore, customers previously serviced at their facilities in Singapore will be serviced at other global fabrication facilities, including Korea and Taiwan. The streamlining reduced headcount by about 60 and save the company about $3 to $4 million annually.
Photronics’ operating margin increased 270 bps sequentially to 11.3 percent, and declined slightly from $15.8 percent year over year.
The company ended the quarter with $192 million in cash, down slightly from $202 million the previous quarter.
According to a vendor trade group SEMI, worldwide semiconductor photomask sales are expected to increase 7 percent over 2011 to be worth $3.35 billion in 2012. If that happened, it would be a record high for the third consecutive year. A move toward advanced technology and increased manufacturing in the Asia-Pacific region are driving growth, SEMI said. Taiwan, where Photronics is relocating some of its customers, became the largest photomask regional market in 2010 and is expected to continue to be the largest market in 2012.
Donald Smith also favors stocks at historical low P/B ratios, a strategy espoused by Ben Graham. Photronics traded at a P/B of .61 on May 24, which is somewhat low compared to its pre-2008 levels:
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