Merrill Lynch is out upgrading
Photronics (
NASDAQ:PLAB) to Buy from Neutral while raising their target to $4 from $2. (The upgrade comes after the co reported its F2Q09 results two days ago)
Merrill notes that although interest expense is increasing in the near term, revenue growth is starting to pick up again and expense cuts already in place increase cash available to service debt. In addition, the total debt level in F3Q drops $30mn when the new lease on the Nanofab takes affect. As PLAB’s financial flexibility increases, valuation multiples should climb toward ongoing concern peer levels. Half the peer P/TBV average would be 0.7x. At that level, PLAB would trade for $4, firm's new PO up from $2.
Debt overhang abates with further restructuring
PLAB recently announced 2 steps to increase their financial flexibility: 1) renegotiated Nanofab lease agreement with Micron and 2) an extension of their credit facility. The Nanofab lease reduces lease payments by $1.8mn per quarter and eliminates $30mn in long-term debt. The modified credit facility includes $10mn of added borrowing capacity to each of the previous step-downs and pushes the maturity date out 6 months to 1/31/11, when the company should be profitable. Each of these steps should begin to help alleviate investor concerns over PLAB’s debt burden.
Cash improving to support increased interest expense
Gross margins were 220bps better than the firm expected due to more aggressive cost reductions and are likely to improve as growth returns. With capex requirements easing this year, PLAB should have ample cash available to handle the $1.3-1.5mn in incremental interest expense from floating rate and FX adjustments.
Notablecalls: Will PLAB join the ranks of
Zale (
NYSE:ZLC),
Tenet (
NYSE:THC) and
Talbots (
NYSE:TLB) today?
It could but there are some differences to this one:
- It's a Nasdaq listed stock. A techie.
- No real short interest there.
On the other hand it's been trading like it wants to break to new 52-week highs. Not sure there are too many shorts out there looking to chop down a $2-3 stock.
Probably goes higher from here. After all, it's Merrill Lynch upgrading it.
