Photronics, Inc. (NASDAQ:PLAB) and Applied Materials, Inc. (NASDAQ:AMAT) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PLAB to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, AMAT is expected to grow at a 27.61% annual rate. All else equal, AMAT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Photronics, Inc. (PLAB) has an EBITDA margin of 23.89%, compared to an EBITDA margin of 28.69% for Applied Materials, Inc. (AMAT). This suggests that AMAT underlying business is more profitable. PLAB’s ROI is 6.10% while AMAT has a ROI of 17.30%. The interpretation is that AMAT’s business generates a higher return on investment than PLAB’s.
If there’s one thing investors care more about than earnings, it’s cash flow. PLAB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.03. Comparatively, AMAT’s free cash flow per share was +1.09. On a percent-of-sales basis, PLAB’s free cash flow was 0% while AMAT converted 10.74% of its revenues into cash flow. This means that, for a given level of sales, AMAT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. PLAB has a current ratio of 5.90 compared to 2.90 for AMAT. This means that PLAB can more easily cover its most immediate liabilities over the next twelve months. PLAB’s debt-to-equity ratio is 0.09 versus a D/E of 0.61 for AMAT. AMAT is therefore the more solvent of the two companies, and has lower financial risk.
PLAB trades at a forward P/E of 18.96, a P/B of 0.84, and a P/S of 1.43, compared to a forward P/E of 14.23, a P/B of 6.32, and a P/S of 3.97 for AMAT. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. PLAB is currently priced at a -19.68% to its one-year price target of $11.33. Comparatively, AMAT is -10.93% relative to its price target of $57.74. This suggests that PLAB is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for PLAB and 1.80 for AMAT, which implies that analysts are more bullish on the outlook for PLAB.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PLAB has a beta of 0.57 and AMAT’s beta is 1.84. PLAB’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PLAB has a short ratio of 3.94 compared to a short interest of 1.39 for AMAT. This implies that the market is currently less bearish on the outlook for AMAT.
Applied Materials, Inc. (NASDAQ:AMAT) beats Photronics, Inc. (NASDAQ:PLAB) on a total of 8 of the 14 factors compared between the two stocks. AMAT higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, AMAT has better sentiment signals based on short interest.