By Ronda Fears
Nashville, Tenn., Dec. 16 - Wachovia Securities, Inc. analysts said they still like Photronics Inc.'s convertibles, noting they see a bottom in the photomasking industry and some stabilization in the balance sheet in the next year.
"Photronics continues to generate positive operating cash flow and is expected to cut its capital spending in half next year. The company remains focused on returning to profitability," said convertible analysts Henry Voskoboynik and Dmitry Melnick in a report Monday.
"We believe the photomasking industry will continue to face challenging times in the near term. However, we view the recent improvement ... and the subsequent increase in activity as an encouraging sign for the photomasking industry next year."
During the October quarter, Photronics said it bought back $41 million of the 6% convertible due 2004, leaving only $61 million outstanding.
The analysts said they believe the company will likely continue repurchasing this issue with cash generated from operations.
The 4.75% due 2006 converts are currently trading with an implied spread of 938 basis points, current yield of 5.67%, yield to maturity of 9.75% and conversion premium of 129.54%.
The analysts believe the credit spread should tighten to 875 basis points over the next 6-12 months, which puts the implied volatility on these bonds is 47.6%.
They lowered their fiscal 2003 earnings per share estimate for Photronics, however, to a loss of 55c from a loss of 10c and the fiscal 2003 revenue estimate to $348 million from $359 million.
The analysts expect Photronics to generate $48 million in operating cash flow over the next 12 months and spend around $60 million on capital expenditures. They see a cash and equivalents balance of $117 million at the end of October 2003.
Photronics anticipates a significant slowdown in business at the end of the year and guided the January-quarter revenue to $75 million to $80 million, a sequential decline of 11% to 17%.
The company believes the April quarter is going to be seasonally up from January, however, based on preliminary customer indications.
Given the magnitude of expected revenue decline, the analysts believe the company will implement additional rounds of expense cuts and consolidate more facilities if the pickup in business fails to materialize next year.
The company finished the October quarter with cash and equivalents of $129 million, down from $149 million at the end of July. Photronics paid down $47 million in long-term debt, including the $41 million convertible debt buyback.
Long- and short-term debt at the end of October was $307 million.
Photronic's $100 million credit facility has several covenants, including a minimum interest coverage ratio of 3x.
The analysts estimate the actual coverage ratio was 5.08x in the October quarter but expect it to decline to 3.41x in the January quarter without setting off the covenant.
The photomasking industry has seen a number of positive developments over the past several weeks, and the analysts noted that Photronics has taken a cautious stance.
Photronics 4.75% convertible due 2006
| Price: | 83.75
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| Stock price: | $13.47
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| Current yield: | 5.67%
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| Yield to maturity: | 9.75%
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| Premium: | | 129.54%
|
| Ratio: | 27.027
|
| Call: | Dec. 20, 2004
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| Call Price: | 101.9
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| Photronics 6% convertible due 2004
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| Price: | 98
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| Stock price: | $13.47
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| Current yield: | 6.12%
|
| Yield to maturity: | 7.46%
|
| Premium: | | 103.03%
|
| Ratio: | 35.7542
|
| Call: | June 1, 2002
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| Call Price: | 101.71
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