Wachovia analysts prefer Photronics convertible, find it 7.5% cheap

By Ronda Fears

Nashville, Nov. 12 - Noting Photronics Inc. continues to buyback its convertibles in the open market, Wachovia Securities, Inc. convertible analysts said the credit spread appears too wide on the issue, which would put it trading 7.5% cheap.

Furthermore, analysts Henry Voskoboynik and Dmitry Melnick said they prefer Photronics over DuPont Photomasks Inc. in the downturn of the photomask semiconductor industry.

Photronics on Monday lowered its October quarter revenue forecast to $90 million, down 8% sequentially from $93 million-$98 million - to a net loss of $0.08-$0.11 per share in the fourth quarter of fiscal 2002, excluding a restructuring charge of $10 million and a $1.7 million gain on convert repurchases.

"In light of recent results and guidance by DuPont Photomasks, Photronics's preannouncement [lower guidance] comes as no surprise. We believe the Nov. 11 action on Photronics's stock supports this notion [as] Photronics shares declined to $9 following the preannouncement, but rebounded to $10.70 by market close," the analysts said in a report Tuesday.

"Photronics's stock currently trades at 0.96x book value and 0.88x the 2003 consensus sales estimate of $389 million. We believe the downside to Photronics's stock should be limited at these levels."

Photronics's 4.75% converts due December 2006 currently trade with an implied spread of 1,135 basis points, a current yield of 6.21%, yield-to-maturity of 12.22% and conversion premium of 164.53%.

The analysts believe the right spread should be 875 basis points, which with a stock volatility assumption of 50% puts the issue trading 7.5%

Wachovia Securities lowered the fiscal 2002 (October) EPS estimate to 5c from 14c and introduced a fiscal 2003 EPS estimate for a loss of 10c on revenue of $359 million. The stock has a buy rating.

Photronics continues to see pricing pressure across all mask geometries with the exception of 0.13 micron, the analysts noted, saying they believe gross margin will decline 360 basis points sequentially to 25% in the October quarter.

The company finished the October quarter with cash and equivalents of $125 million, down from $149 million at the end of the July quarter. Photronics paid down $47 million in long-term debt, including $41 million in convertible debt buyback. The company borrowed $11 million on its $100 million revolver.

Photronics sold the 4.75% converts in December to repay its revolving credit facility, as it was not in compliance with minimum interest coverage ratios in its revolver.

Wachovia analysts estimate Photronics's cash flow from operations was $23 million during the quarter. The company expects to generate at least $25 million in free cash flow over the next 12 months.

"Photronics intends to reach EPS breakeven in fiscal 2003, suggesting that more expense cuts and/or headcount reductions are on the horizon," the analysts said.

"We expect Photronics to guide for further top- and bottom-line deterioration in the January quarter as a result of the continued price war with DuPont Photomasks and the expected 2-4 week factory shutdowns by numerous semiconductor manufacturers during December.

"We continue to favor Photronics over DuPont Photomasks in the photomask space. Despite the revenue shortfall, Photronics continued to gain market share against DuPont Photomasks in the October quarter."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.