Photronics (Nasdaq:PLAB) SELL

We are issuing a sell on Photronics (PLAB). Our original buy recommendation was based on strength in  high-end photomasks that produce higher than average profits. Although the company has seen strength in some of these, weakness in lower-end masks has outweighed any benefit that might have been seen.

We did not expect such pronounced weakness in products related to cell phones and laptops. Although the just reported quarter will likely be the lowest in revenue for the year, the upward turn expected for the third quarter is not materializing.

The company officially beat estimates by $.03 for the April quarter, but the upside was entirely due to a lower tax rate, a messy beat at best. Management lowered estimates for the October quarter and is losing credibility quickly. Although they note business is moving in the right direction, we are stepping aside as it is obvious the low end business may take some time to improve.

Photronics is still profitable and has a strong balance sheet with net cash of $1.60 per share. It’s possible the stock will move up from here but we’ve lost our patience and are looking for better stocks.