After a 35 per cent drop in the share price from the 52-week high of Photronics, Inc. (PLAB), Zacks senior electronic industry analyst Ken Nagy, CFA issues a Sell rating on the shares. The following excerpts explain his position:

'Photronics is an OEM of photomasks used by the semiconductor manufacturing industry in the fabrication of IC devices and LCD displays. In the October quarter the top-line results were better than expected. The company has strong technical development capabilities, and is experiencing growth in its 130nm and 90nm product lines. In the near-term, this growth will not outshine a maturing legacy product and soft markets. Increasing wafer sizes with shrinking geometries are raising demand for increasingly expensive IC photomasks.

'The company is expanding advanced technology node production capability with a second 65nm line (in Korea). Photronics quickly captured an estimated 16% share of the flat panel photomask market and is expanding capacity with a new LAM plant (Taiwan). Photronics is restructuring operations, controlling costs and increasing operations in low-cost regions like China. The manufacture of photomasks is increasingly turning to in-house facilities at more mature nodes.

'PLAB shares are currently trading at a 24.1x multiple of our fiscal 2008 earnings estimate (P/E). In our view, the increasing design activity leading into the fiscal year 2007, the growing qualification list, the transition to lower geometries and the company's cost control initiatives, will enable the firm to provide long-term financial growth.

'With the share price dropping approximately 35% off the 52-week high, the successful completion of an equity offering and the continued pay-down of debt, we prefer to be on the sideline until the Flat Panel Display markets pick up. Consequently, we rate the shares of PLAB a Sell and take our price target down to $10 from $13, which corresponds to a 20.4x multiple.'