Echelon Note, $3.50 TPNot much in the way of helpful info here. You cant expect analysts to negatively comment on exec comp, although I would have expected something to explain why the name might be under pressure. In any case, here it is for those who want to hear their thoughts:
Bottom line: Photon Control Inc. (“Photon”, “PHO”, or “the Company”) reported its Q420
results this morning and held a conference call earlier today. Sales came in ahead of our
estimate and guidance. With backlog sitting at record levels (in USD terms), the Company
guided to Q121 top line of $16-18M, ahead of our $16.0M estimate. The Company’s EBITDA
came in below our estimate on increased opex investments ahead of what is shaping to be
another record year. We are reiterating our Top Pick call as we continue to be constructive
on industry dynamics. Drivers such as, e-commerce, gaming, video streaming, AI, cloud
computing, IoT, and the deployment of 5G networks are tailwinds that will drive additional
data center capacity requirements benefiting Photon.
Valuation too compelling to ignore: We believe Photon’s balance sheet strength together
with its leverage to an economic upcycle constitute attractive risk-reward characteristics.
Despite the strong stock performance since our late 2015 initiation, valuation remains
exceptionally attractive with earnings growth keeping pace with stock performance. Namely:
We expect the Company to generate $0.20/shr of free cash flow in 2022, versus a stock
price of $2.62/shr ($2.16/shr ex-cash), implying a FCF yield of 9.2%.
Photon currently trades at 10.1x/7.0x our 2021/2022 EBITDA estimates and 18.4x/12.2x
our 2021/2022 earnings estimates. We believe these to be exceptional valuation metrics
by any standard. For reference, WFE component suppliers trade at a median of $23.5x
NTM EBITDA.
Q420 Details:
Sales/EBITDA came in at $14.9M/$3.7M (25.0% margin), a +68.6%/+75.6% y/y. We went
into the quarter calling for sales/EBITDA of $13.9M/$4.6M (33.5% margin) and the
Company had guided to top line of $12-14M.
EBITDA was impacted by GM% coming in at 54.6% vs. our forecast of 57.5%. For
reference, Photon delivered 62.5% last quarter and 52.6% last year. On a sequential
basis, GM% was impacted by (i) product mix that largely favored lower margin products
during the quarter and (ii) fixed cost leverage working against the Company with sales
down q/q. Higher opex investments relative to our forecast (+$0.6M) with all-in-opex
coming in at $5.0M vs. $4.5M last quarter and $2.6M last year. Namely, the Company
increased R&D investments to $1.8M vs. $0.8M last year and $1.5M last quarter, to
address market opportunities and service its customers.
The Company’s backlog remains near record high coming in at $30.3M vs. $27.0M and
$29.6M in the last two quarters and vs. $20.8M last year, implying a 45.2% y/y increase.
The Company’s free cash flow came in at $2.5M vs. last year’s -$1.0M. Cash balance
increased to $48.4M from $46.6M from last quarter.
Estimate revisions: We are rejigging our estimates for 2021. Namely, we are increasing our
opex estimate to an average of $5.3M/quarter to account for increased investments to
address multiple market opportunities (namely, FBG commercialization and penetrating the
deposition segment). We are also decreasing our GM% forecast to account for the
unfavorable FX move with the CAD/USD strengthening ~15% y/y. Net net, our 2021 sales/EBITDA move to $74.6M/$22.3M from our previous $72.9M/$28.6M. For 2022, our sales/EBITDA are slightly higher at $87.9M/$32.4M vs. $82.4M/$31.6M previously. Our longer-term forecasts are also higher as we now give some credit to the Company’s penetration into the deposition segment on the back of its current investments. Our DCF-derived $3.50/shr target price is unchanged