Photon Control (Toronto: PHO) makes a wide range of optical sensors and instruments to measure temperature, pressure, position, and flow; its products play a vital behind the scenes role in the everyday experience of technology consumers, explains Ryan Irvine, contributing editor to Internet Wealth Builder.
As the world moves towards the proliferation of intelligent devices, from smart phones to smart toasters, the need for semiconductor devices will also proliferate. The company's end market customers are semiconductor device manufacturers that have increasing needs for faster, lower cost equipment.
The company's products are typically designed as part of the device manufacturing machines that fabricate the end-user chips that are then used in computers, smart phones, wearable technology, and even automotive sensors.
For those unfamiliar with the Internet of Things it is a world where machines are embedded with sensors that allow them to relay data to each other with little to no human involvement. Basically, it means all sorts of everyday items are connected to the Internet — and basically talking to each other.
The Internet of Things has been around for a while. In fact, by 2008 there were already more devices connected to the Internet than human beings, but it has really only recently hit an inflection point. By 2020, just three years from now, that number is expected to clock in at 50 billion devices.
Almost all of these devices need semiconductors. With this type of demand, it is not hard to see why Photon Control, which assists in the manufacturing of new semis, just reported its highest backlog entering a quarter in its history, and why its stock is up 61% since December.
Photon Control is a solid success story that has largely flown under the radar in Canada. Perhaps most importantly, the company is entering 2017 with another record backlog.
Due to its high exposure to the semiconductor industry, business has historically been cyclical and while we expect this to smooth out as the base of original equipment manufacturers (OEMs) grows and via product diversification, there will likely be another downturn at some stage.
The good news is that the company has experienced higher highs and lower lows in terms of sales and profitability over time as it gains more customers. We expect this to continue into the future.
Based on current fundamentals, which include a trailing p/e of under nine, the company boasts a very strong balance sheet with zero debt and a cash balance of $32.5 million, or $0.31 per share.
If we strip this out, the company's price-to-earnings based on the core business is around 13 - which remains a reasonable multiple. Given the current backlog, the near-term outlook is once again very strong.
With its strong backlog, balance sheet, history of profitability and reasonable valuations, investors with a long-term outlook (two to five years) should be rewarded over this time frame. As such we maintain our Long-Term rating at Buy.
