Intel Corporation (INTC) & More: Is This Photomasks Manufacturer a Buy at Its Current Price?

Last Tuesday, author Jack Hough of Barron’s commented that one small-cap chip stock had a 50% potential upside. That chip stock is Photronics, Inc. (NASDAQ:PLAB), a photomasks manufacturer. Since the beginning of the year, Photronics has experienced a decent gain of 8.7%. Should investors be bullish about Photronics at its current trading price? Let’s find out.

Large customer concentration

Photronics, Inc. (NASDAQ:PLAB), organized in 1969, is one of the global leading maker of photomasks, a key element in the fabrication of integrated circuits and flat panel displays, operating eight manufacturing facilities located in Europe, Taiwan, Korea and the U.S. The majority of its revenue, $350.1 million, or 77.7% of the total 2012 revenue, was generated via its products for integrated circuits while the sales for flat panel displays fabrication were $100 million in 2012 revenue. In terms of geographic area, Korea is the biggest revenue source, with $161.1 million in revenue. The U.S. ranked second with $135.2 million in sales. Taiwan and Europe contributed $109.2 million and $40.7 million in 2012 revenue, respectively. The company has quite a customer concentration. With 600 customers globally, Samsung Electronics Co., Ltd. (KRX:005930) is the largest customer, accounting for 22% of the total sales in 2012. Its five largest customers represented around 43% of 2012 revenue.

Slow revenue growth but consistent positive cash flow

In the past five years, Photronics, Inc. (NASDAQ:PLAB) hasn’t experienced good growth in its top line, climbing from $423 million in 2008 to only $450 million in 2012 while the net income shot up from the loss of $211 million to a profit of $28 million during the same period. A huge loss incurred in 2008 was due to significant charges of more than $200 million in goodwill and long-lived assets. Thus, as they were non-cash charges, the operating cash flow was still positive and on the rise, from $92 million in 2008 to $133 million in 2012. The free cash flow also rose from -$13 million to $36 million in the same period. What makes me interested is the fact that Photronics has a conservative capital structure. As of Jan 2013, it had $563 million in total stockholders’ equity, $218 million in cash and only $175 million in both long and short-term debt.

Jack Hough of Barron’s wrote that according to JPMorgan Chase & Co. (NYSE:JPM), the company has been increasing its market share compared to larger Japanese peers including DAI NIPPON PRINTING (NASDAQOTH:DNPCF). Interestingly,