Photon Control keeps “Top Pick” status with Echelon Wealth

Echelon Wealth Partners analyst Amr Ezzat has upped his target on red hot stock Photon Control (Photon Control Stock Quote, Chart, News TSX:PHO), saying in an update to clients on Monday that recent industry commentary points to resilient end-market demand for PHO’s products during COVID-19.

Precision measurement solutions company Photon Control designs, manufactures and distributes optical sensors and instruments primarily used in the wafer fabrication equipment side of the semiconductor industry. Originally formed in 1988, Photon went public in 2000.

The company is coming off a bang-up quarter, its first quarter 2020 reported on May 6, which has propelled the stock to close to a double in the ensuing weeks. Sales and EBITDA were up 96 per cent to $17.3 million and EBITDA rose 229 per cent to $7.0 million, representing a 40.2 per cent margin.

PHO had free cash flow of $8.0 million for its Q1 and ended the quarter with a cash balance of $41.2 million, up from $33.4 million for the previous quarter, and a 50 per cent increase in its backlog.

Ezzat said the jump in backlog points to more strong quarters on the horizon for Photon Control and called the company’s free cash flow conversion exceptional.

With all the gains in the stock, Ezzat is still saying there’s upside available, however.

“We note that despite the strong stock performance since our late 2015 initiation (nearly a three-bagger), valuation remains exceptionally attractive with earnings growth keeping pace with stock performance,” Ezzat said.

“Photon currently trades at 6.8x our 2020 EBITDA estimate and 9.0x our 2020 earnings estimate (ex-cash). We recently confirmed Photon as a Top Pick (on April 5) and put it forward as a bargain buy in the age of COVID-19 (on March 24). We believe the Company’s balance sheet strength together with the Company’s leverage to an economic upcycle constitute attractive risk-reward characteristics,” he wrote.

For insight into how PHO’s industry is faring during the pandemic, the analyst supplied recent quotations from two wafer fabrication equipment bellwethers, namely, Lam Research and Applied Materials, where representatives from both are seeing continued strength ahead.

Ezzat quoted Lam Research’s Douglas R. Bettinger who said, “Demand remains very strong. Customers haven’t really meaningfully changed their plans in any way, shape or form relative to demand for equipment.”

“Company’s results in our fiscal Q1 and fiscal Q2 on a year-over-year basis in our semi business was really, really strong,” said Photon CFO CFO Daniel J. Durn. I think our semi-related businesses were up 18 per cent in fiscal Q1, 13 per cent in fiscal Q2. And so for the first half of our fiscal year, we’re up 16 per cent in our semi-related business. We exited Q2 with record backlog in those businesses.”

For his update, Ezzat reiterated his “Buy” rating and “Top Pick” status and upped his target price from $2.00 to $2.25, which at press time represented a projected return of 21.6 per cent.