The Good And Bad: Photronics & Rogers Corporation

9 new stocks made the Most Attractive list this month, while 6 new stocks joined the Most Dangerous list.

September Performance Recap

The Most Attractive Stocks (-1.3%) outperformed the S&P 500 (-3.7%) last month by 2.4%. The best performing large cap stock gained 9% and the best performing small cap stock was up 11%. Overall, 33 out of the 40 Most Attractive stocks outperformed the S&P 500.

The Most Dangerous Stocks (-6.2%) outperformed the S&P 500 (-3.7%) as a short portfolio last month by 2.5%. The best performing large cap short stock fell by 21% and the best performing small cap short stock fell by 20%. Overall, 22 out of the 33 Most Dangerous stocks outperformed the S&P 500 as shorts.

The Most Attractive/Most Dangerous Model Portfolios outperformed as an equal-weighted long/short portfolio by 4.9%.

The Most Attractive stocks have high and rising returns on invested capital (ROIC) and low price to economic book value ratios. Most Dangerous stocks have misleading earnings and long growth appreciation periods implied by their market valuations.

Most Attractive Stocks Feature for October: Photronics

PLAB

Photronics Inc. (PLAB) is the featured stock from October’s Most Attractive Stocks Model Portfolio.

Photronics has grown revenue by 12% compounded annually and net operating profit after tax (NOPAT) by 42% compounded annually since fiscal 2017. Photronics’ NOPAT margin increased from 5% in fiscal 2017 to 21% in the trailing twelve months (TTM), and invested capital turns rose from 0.5 to 0.7 over the same time. Rising NOPAT margins and invested capital turns drive Photronics’ return on invested capital (ROIC) from 3% in fiscal 2017 to 15% in the TTM.

Figure 1: Photronics’ Revenue and NOPAT Since Fiscal 2017

Photronics Is Undervalued

At its current price of $21/share, PLAB has a price-to-economic book value (PEBV) ratio of 0.7. This ratio means the market expects Photronics’ NOPAT to permanently decline by 30%. This expectation seems overly pessimistic for a company that has grown NOPAT by 42% compounded annually since fiscal 2017 and 10% compounded annually since fiscal 2011.

Even if Photronics’ NOPAT margin falls to 14% (below the three-year average and 19% over the TTM) and the company’s revenue grows just 6% (lower than five-year average of 12% and TTM YoY growth of 10%) compounded annually through fiscal 2032, the stock would be worth $25/share today– a 21% upside. Should Photronics grow profits more in line with historical levels, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I made based on Robo-Analyst findings in Photronics’ 10-Qs and 10-Ks:

Income Statement: I made $97 million in adjustments, with a net effect of removing $38 million in non-operating expenses (4% of revenue).

Balance Sheet: I made $808 million in adjustments to calculate invested capital with a net increase of $93 million. One of the most notable adjustments was $272 million in adjustments for asset write-downs. This adjustment represents 24% of reported net assets.

Valuation: I made $758 million in adjustments, with a net increase in shareholder value of $106 million. The most notable adjustment was $291 million in minority interests. This adjustment represents 22% of Photronics’ market value.

Most Dangerous Stocks Feature: Rogers Corporation

ROG

Rogers Corporation (ROG) is the featured stock from October’s Most Dangerous Stocks Model Portfolio.

Rogers Corporation’s NOPAT has fallen from $104 million in 2017 to $52 million over the TTM. NOPAT margin has fallen from 13% in 2017 to 5% in the TTM, while invested capital turns fell from 0.8 to 0.6 over the same time. Falling NOPAT margins and invested capital turns drive Rogers Corporation’s ROIC from 11% in 2017 to 4% over the TTM.

Rogers Corporation’s economic earnings, the true cash flows of the business which take into account changes to the balance sheet, have fallen from $55 million in 2017 to -$47 million over the TTM.

Figure 2: Rogers Corporation’s Economic Earnings Since 2017

ROG Provides Poor Risk/Reward

Despite its poor fundamentals, Rogers Corporation’s stock is priced for significant profit growth, and I believe the stock is overvalued.

To justify its current price of $130/share, Rogers Corporation must improve its NOPAT margin to 10% (up from 5% over the TTM) and grow revenue by 7% (vs. consensus of -0.4% in 2023 and 3% in 2024) compounded annually through 2032. In this scenario, Rogers Corporation’s NOPAT would grow and 13% compounded annually and equal $193 million in 2032, or nearly double its best ever NOPAT of $107 million. I think these expectations look overly optimistic.

Even if Rogers Corporation improves its NOPAT margin to 7% and grows revenue 6% (above five-year average of 4%) compounded annually through 2032, the stock would be worth no more than $83/share today – a 36% downside to the current stock price.

Each of these scenarios also assumes Rogers Corporation can grow revenue, NOPAT, and FCF without increasing working capital or fixed assets. This assumption is unlikely but allows me to create best case scenarios that demonstrate the high expectations embedded in the current valuation.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I made based on Robo-Analyst findings in Rogers Corporation’s 10-Qs and 10-K:

Income Statement: I made $240 million in adjustments, with a net effect of removing $60 million in non-operating income (10% of revenue).

Balance Sheet: I made $537 million in adjustments to calculate invested capital with a net decrease of $91 million. One of the most notable adjustments was $136 million in asset write-downs. This adjustment represented 9% of reported net assets.

Valuation: I made $242 million in adjustments to shareholder value with a net decrease of $46 million. Apart from total debt, the most notable adjustment to shareholder value was $4 million in over funded pensions. This adjustment represents <1% of Rogers Corporation’s market value.

Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.