Photronics Valuation and Swatch Group Summary
Photronics Valuation
The other week, I introduced Photronics (PLAB) because it was trading at a low free cash flow multiple, which immediately caught my attention. As a refresher, Photronics produces photolithography masks, an essential component in the manufacturing of integrated circuits. Now that I’ve had a chance to dive deeper into the company, I’m ready to walk through a more formal valuation.
Over the past few years, PLAB’s PE ratio has ranged from about 7.5 to 15 (sometimes hitting both extremes within the same year). That kind of swing highlights how volatile the stock can be. To determine the best way to value the business, I looked into its return on assets. In recent years, PLAB’s ROA has been above its estimated cost of capital, but if you go further back, returns have been fairly mediocre. I suspect this is partly because the company often holds a large cash balance and may have been reinvesting heavily in the business.
Because ROA isn’t consistently strong, I’m using an earnings power valuation method, which doesn’t rely on growth assumptions. PLABs revenue trended sideways for much of the 2010s before beginning a meaningful ramp-up after 2019. A big spike in sales occurred in 2022, likely due to increased demand for higher-end photomasks. Since then, sales have tapered a bit, 2024 came in at $867M, and the trailing twelve-month (TTM) figure is $857M. To me, this looks like a minor cyclical dip within a broader growth trend, so for my model, I’m assuming a go-forward revenue base of $850M.
The company’s five-year average gross margin is 31.4%, and TTM operating expenses are around $95M. Applying the average margin to my revenue estimate and subtracting current operating expenses, I estimate operating income at $171.9M, giving us an operating margin of 20.2%. After assuming a 25% tax rate, that gives me net operating profit after tax (NOPAT) of $128.9M.
For the discount rate, I’m using 8% since PLAB is a small-cap company, but it has no debt and holds a lot of cash. That gives me an enterprise value (EV) of about $1,611M. Adding back $558M in cash and subtracting $396M in minority interest, I arrive at an equity value of approximately $1,773M. With 61 million shares outstanding, that works out to a fair value of around $29 per share.
I personally bought some shares at $18.50, and while the stock has already rallied about 10% since then, I still think there’s plenty of upside from here based on these fundamentals.
Swatch Group Summary
Swatch Group (SWGAY) is a Swiss-based company operating in the watch and jewelry industry, with a vertically integrated structure that spans from production to distribution. The company’s core business lies in its Watches & Jewelry segment, which includes a portfolio of 16 brands catering to a wide range of price points—from accessible fashion watches to prestigious luxury timepieces. Notable top-tier brands include Omega and Blancpain. In addition to its consumer facing divisions, Swatch Group also operates an Electronic Systems segment, which accounts for about 5% of sales. This division produces quartz crystals, miniature batteries, and specialized sports timing equipment. Swatch also manufactures watch movements and components for external clients. The company remains majority-controlled by a founding family, which holds 44% of the equity.
Geographically, Swatch’s 2024 sales were distributed fairly evenly across the globe, with Europe accounting for 28%, China for 27%, the rest of Asia for 25.5%, and the Americas for 18%. However, a 30% year-over-year sales decline in China weighed heavily on performance, while other regions saw flat results. Management chose to maintain production capacity and marketing expenditures, including Olympic sponsorships, despite weaker demand. This was done in an attempt to preserve workforce stability and brand presence. While this conservative approach has hurt short-term margins, it reflects a longer-term strategic view that may appeal to patient investors, even if it deters those seeking near-term gains.
Financially, Swatch Group appears strong on an asset basis. As of 2024, the company held $1,565M in cash equivalents and $8,570M in inventory, with total current assets of $11,223M against just $1,991M in total liabilities. This results in a net current asset value (NCAV) of $9,232M, or approximately $9 per share, with 1.026 billion shares outstanding. The company also owns a significant base of physical assets, with gross property, plant, and equipment (PP&E) valued at $9.57B and a net book value of $3.55B.
Swatch’s valuation looks compelling relative to both its assets and historical earnings multiples. The stock currently trades at a price to book ratio of 0.58 (trailing twelve months), well below its historical PB range, which has averaged closer to 1.2 over the past several years. The company’s long-term return on assets averages 5.74%, and it has historically traded at a PE ratio around 20. The combination of low valuation and seemingly temporary headwinds regarding the downturn in China, suggests Swatch may be undervalued.
While the lack of quarterly reporting (the company only reports twice a year) adds some uncertainty, Swatch's conservative management and focus on long-term brand value rather than aggressive cost cutting make it a potentially attractive investment for those with a longer time horizon. The current weakness in consumer sentiment and competition from smartwatches are valid concerns, but Swatch appears well positioned to recover, especially if Chinese demand rebounds in the next one to two years. From both an asset and earnings perspective, the stock appears cheap and I ended making small position around $8.
Tickers mentioned: PLAB 0.00%↑ $SWGAY
longterm plab holder. conservative mgmt has great governance record, rare success case in china.
however, the future relies on regionalization of semi independence, especially america, and plab plans are vague.
i expect risc-V $0 licensing to play a big global role, still under the radar.
china will someday to abruptly take a lot of masks in-house and\or prefer chinese suppliers. plab balance sheet is prepared.