Seeking Alpha: IPG Photonics Still On Top Of A Rising Mountain

I've made no secret of the fact that I like and admire IPG Photonics (NASDAQ:IPGP), and I can't say that the shares haven't rewarded that enthusiasm. Since my first piece for Seeking Alpha on the company, the shares are up more than 60%, trouncing other laser companies like Rofin-Sinar (NASDAQ:RSTI), Coherent (NASDAQ:COHR), and Newport (NASDAQ:NEWP), and beating the NASDAQ by a relatively comfortable margin as well.

When I last wrote about the company, the business was running quite smoothly, but I was concerned about the expectations baked into the valuation. The shares have been more or less flat since then on a "net" basis, but I did suggest that investors could look for dips into the $80s as buying opportunities and investors got two such chances (including a move into the $70s).

Now what? I still like this business, and I think IPG Photonics is poised for a decade of revenue growth that averages out to around 9% to 10% a year coupled with excellent free cash flow margins. I do have some worries about the potential of "peak margin", as well as the possibility that IPG Photonics' growth will make it more susceptible to the vagaries of the machine tool cycles, but no stock comes without risks. The shares do look a little undervalued now, but I'd be tempted to try another "buy the dip" move given the macro uncertainties.

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IPG Photonics Still On Top Of A Rising Mountain

Seeking Alpha: At IPG Photonics, Strong Performance Backs Aggressive Expectations

In contrast to Rofin-Sinar (NASDAQ:RSTI), IPG Photonics (NASDAQ:IPGP) continues to perform very well on the back of growing adoption of fiber lasers and strong operating efficiency. This has been may favorite laser name for a while now, and the 35% move in the stock price since my last piece has been nice to see (and well above the results from Rofin-Sinar, Coherent (NASDAQ:COHR), and Newport (NASDAQ:NEWP)).

Although Rofin-Sinar has looked a little stronger of late in its fiber laser efforts, it is still well behind IPG Photonics and that is going to be a difficult gap to fill. Meanwhile, while Rofin-Sinar tries to get to where IPG Photonics already is, the latter is moving on with newer offerings like green lasers, ultrafast lasers, UV lasers, and products targeted at large applications like spot welding and paint stripping. The only major downside to the IPG Photonics story that I see today is the high level of expectations - today's price already seems to anticipate a 10-year run of greater than 10% revenue growth and FCF margin expansion into the mid-20%'s. While I think the company can do that, I'm not sure it can do so much better that there's a lot of upside at today's price.


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At IPG Photonics, Strong Performance Backs Aggressive Expectations

Seeking Alpha: Rofin-Sinar Making Progress, But Not Particularly Quickly Or Dramatically

I suppose you could approach Rofin-Sinar Technologies' (NASDAQ:RSTI) performance over the last year as something of a Rorschach test. A bear can point to the company's ongoing lackluster sales performance, bottoming margins, and lack of progress in really challenging IPG Photonics (NASDAQ:IPGP) in the growing fiber laser market. A bull could argue that the company has stabilized its revenue situation (and that currency moves make the comps worse than they really are), put in a bottom with margins, and can look to new product introductions in fiber and ultrafast lasers to help drive better results in the coming quarters.

For my part, my feelings haven't changed all that much since I last wrote on the shares. I do think that the market is still undervaluing the company's long-term growth prospects, but I don't think the undervaluation is all that great. I'm also concerned that it has taken this long for Rofin-Sinar to really get moving in fiber lasers and that the company is stuck as a legacy producer in an industry with a lot of R&D/product feature competition on the high end and growing price competition on the low end.

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Rofin-Sinar Making Progress, But Not Particularly Quickly Or Dramatically

Seeking Alpha: IPG Photonics Continues To Grow, While Growing Its Addressable Markets

Fiber laser pioneer IPG Photonics (NASDAQ:IPGP) continues to execute pretty well, though you may not know it from the reaction of the market. I still liked the long-term fundamental story back in March, but thought the valuation was getting a little steep. Since then, the shares have gone almost nowhere (while large laser rival Rofin-Sinar (NASDAQ:RSTI) has declined a few percentage points).

I think the last six months or so may be an example of a pause that refreshes. Fiber lasers continue to gain share in core markets like cutting, welding, and marketing, and IPG Photonics continues to develop products for multi-hundred million dollar applications like UV microprocessing, aluminum and high-strength steel welding, and sapphire glass cutting. IPG Photonics continues to leverage its cost and manufacturing advantages and hasn't seen a particularly deleterious impact from Chinese competition yet. With the shares looking about 10% undervalued, I'm warming up to IPG Photonics as a stock to acquire at these prices.

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IPG Photonics Continues To Grow, While Growing Its Addressable Markets

Seeking Alpha: Rofin-Sinar Still Not Up To Speed

Rofin-Sinar Technologies (NASDAQ:RSTI) remains frustratingly stuck in "muddle through" mode as waiting for a return to growth has sometimes felt like waiting for Godot. The company's performance in fiber lasers continues to be erratic and while management has made some progress with underlying manufacturing margins, improvements in demand from machine tool and semiconductor customers haven't offset weakness in consumer electronics and solar markets.

What to do about the shares, then? I still like IPG Photonics (NASDAQ:IPGP) better as a business, but back in February/March I thought that Rofin-Sinar looked a little undervalued on a relative basis. Since my last Rofin-Sinar piece, Rofin-Sinar shares have risen about five percent and outperformed its peer group (except for GSI Group (NASDAQ:GSIG)), but not by a lot. I still think these shares are undervalued on a long-term basis (assuming mid-single digit revenue and FCF growth), but the combined impact of high-end fiber laser competition from IPG Photonics and low-end competition from Chinese manufacturers is a real risk to consider.

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Rofin-Sinar Still Not Up To Speed

Seeking Alpha: IPG Photonics Continuing To Expand Its Fiber Laser Opportunity

In the six months since I wrote on IPG Photonics (IPGP) as a Top Idea ("IPG Photonics Looking To Innovation And Integration") the shares have registered a solid 26% gain. In that time, whatever changes have come have largely been to IPG Photonics' credit - the company maintains a significant lead over the likes of Rofin-Sinar (RSTI) and the company's aggressive product development efforts continue to expand the company's addressable market and long-term revenue potential.

I believe IPG Photonics remains a quality name in this space, but the shares are not as obviously cheap as they once were. I still expect long-term revenue growth in the neighborhood of 12% and I am still willing to project long-term FCF margins in the low 20%'s. There is upside to those numbers if the company's addressable markets (and/or share within them) expand even faster, but these shares look more like a "bullish hold" than a strong buy today.

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IPG Photonics Continuing To Expand Its Fiber Laser Opportunity

Seeking Alpha: Rofin-Sinar Needs To Get Moving

When I last visited Rofin-Sinar Technologies (RSTI), I thought that the valuation held some appeal for long-term investors, but that there were some meaningful operating/execution risks in the meantime and that I preferred fiber laser specialist IPG Photonics (IPGP). That call has worked out pretty well, as IPGP is up more than 15% from that article, while Rofin-Sinar has fallen about 6%.

Rofin-Sinar is definitely seeing some pressures in its business today, as semiconductor, electronics, PV, and medical markets have fallen off. It is also not obvious to me that the company is making as much progress as it needs to in closing the gap with IPG Photonics. All of that said, the valuation is getting less demanding and if management can rebuild margins back to past levels the shares could do well from here.

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Rofin-Sinar Needs To Get Moving

Seeking Alpha: Rofin-Sinar Looking To A Cyclical Recovery And Fiber Share Gains

About a month and a half ago, I wrote that IPG Photonics (IPGP) was a good name to know in lasers for its growth potential tied to the expansion of the fiber laser market (where it has at least two-thirds market share). Circling back, it's also worth exploring the potential of the 800lb gorilla in the overall industrial laser space - Rofin-Sinar Technologies (RSTI).

Rofin-Sinar is the leading company in market share terms in a market that I'd characterize as "cyclical growth" - there are certainly ups and downs from year to year, but the overall laser market continues to outgrow overall industrial spending on a multi-year basis. With a strong IP position and industry reputation, not to mention a wide array of products, Rofin-Sinar can benefit from the ongoing expansion of industrial automation and the continuing penetration of lasers into new cutting, welding, and marking applications.

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Rofin-Sinar Looking To A Cyclical Recovery And Fiber Share Gains