China Likely Bottoming For IPG Photonics, But Rising Competition Is A Threat

Shares of fiber laser specialist IPG Photonics (IPGP) have rebounded strongly from late December lows (up almost 45%) as investors are less fearful of a sharp decline in sales to China and overall industrial demand, as well as holding more optimism over future opportunities in core cutting/welding, 3D manufacturing, EV battery assembly, and so on. Although I do believe revenue could return to year-over-year growth in the second half of this year, I’m more concerned about the long-term margin consequences of increased competition from Chinese rivals and whether IPG can continue to find attractive new markets/applications for higher-performance lasers that would really allow the company to leverage its R&D and engineering advantages.

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China Likely Bottoming For IPG Photonics, But Rising Competition Is A Threat

China Takes Another Bite Out Of IPG Photonics

When your prime market, the market where you generate close to 50% of your revenue, is in trouble, it’s tough to work around that. Such is the situation for IPG Photonics (IPGP), and this once high-flying leader in fiber lasers has gotten pummeled over the last three months on revenue and earnings weakness due to China. The latest blow came on Friday, with the company announcing that third quarter revenue and EPS were going to come in about 5% or so short of where expectations were a week ago.

IPG’s China-related risks showed up in the second quarter, and clearly they are continuing to linger, putting near-term revenue and margins very much in doubt. What’s more, it’s at least plausible to me that this period of trade squabbling between the U.S. and China is going to give a boost to Chinese fiber laser companies like Han’s Laser and Wuhan Raycus and improve their profile with Chinese manufacturing customers. Although IPG shares do look undervalued, and the multiples are lower than they’ve been in quite some time, anybody considering the shares today needs to be prepared to withstand further near-term losses until the situation bottoms out.

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China Takes Another Bite Out Of IPG Photonics

Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

Fiber laser innovator IPG Photonics (IPGP) is a good example of why I'm willing to pay up for good companies (and/or hold stocks that otherwise seem richly-valued) - the really good companies out there always seem to find ways to innovate and expand their addressable markets, as well as generate improved operating leverage. IPG has continued to exceed my expectations on both fronts, and the trailing return metrics over the past one, three, and five years (and beyond) have been exemplary.

I don't mind paying up for good companies, but IPG shares do have a track record of significant pullbacks from time to time - whether due to the company not meeting lofty expectations on a quarterly basis or wider concerns about the health of manufacturing spending. The valuation today seems to be pricing in total expected returns in the high single digits, which isn't bad, but I'd much prefer to buy in when the expected returns are in the double digits.

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Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

IPG Photonics Already Seeing A Strong Recovery

Buying good companies when they are beaten up a bit by disappointed growth-oriented investors continues to be a sound strategy, provided that the underlying market drivers are only going through a temporary patch of trouble. So it has been with IPG Photonics (NASDAQ:IPGP). I thought the slowdown in the metalworking markets, and the pressure it was creating on IPG's valuation, were an opportunity back in the summer of 2016, and the shares have moved up about 60% since then. To be fair, investors would have done even better in rival laser company Coherent (NASDAQ:COHR), or turnaround metalworking play Kennametal (NYSE:KMT), but IPG's performance stacks up pretty well with other metalworking stories like Lincoln Electric (NASDAQ:LECO) and Colfax (NYSE:CFX).

IPG Photonics continues to do a commendable job of moving the goal posts out in terms of what can be accomplished with its high-power lasers. That is creating new opportunities to take share away from non-laser systems as well as to replace old non-fiber laser installations. Looking ahead, there are still attractive opportunities in areas like cutting and welding, as well as drilling, not to mention newer applications like theater projection, OLED production, and 3D manufacturing. IPG also continues to move forward with new(er) technologies like UV and ultrafast lasers that can still add more hundreds of millions of dollars to the long-term addressable market.

With a strong recovery in revenue and strong recent growth in machine tool orders in China, I'm not surprised that investors have come back to this name. I still believe in the prospects for high-single-digit revenue growth and mid-teens FCF growth, but the high-single-digit implied total return isn't as compelling relative to the prospects a year ago.

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IPG Photonics Already Seeing A Strong Recovery

Seeking Alpha: A Metalworking Slowdown Creates An Opportunity With IPG Photonics

A lot of what I was worried about concerning IPG Photonics (NASDAQ:IPGP) back in December has come to pass in 2016, as the company has seen weaker manufacturing activity and greater competition in China squeeze the company's once-robust growth rates. The market has reacted pretty predictably too, tossing the stock around between the mid-$70s and $103 as investors try to weigh out the opportunities that double-digit underlying market growth and new product introductions offer against the specter of rising competition and a prolonged slowdown in major end markets.

I certainly can't promise that the third quarter won't bring another downward revision to guidance or that the stock won't see the $70s again. That said, I think IPG Photonics is well placed to maintain its leadership in fiber lasers and expand its addressable market opportunities. Low double-digit free cash flow growth is hardly a conservative projection in my book, but I think IPG Photonics can hit that mark and support a fair value in the mid-$90s.

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A Metalworking Slowdown Creates An Opportunity With IPG Photonics

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: 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

Seeking Alpha: IPG Photonics Looking To Innovation And Integration

It's still pretty tough out there if you're in the laser business. While Newport (NEWP) and II-VI (IIVI) have come alive in the last three months and Coherent (COHR) and Rofin-Sinar (RSTI) are both in the green for the full year, only Newport has kept pace with the S&P 500. Even so, IPG Photonics (IPGP) has done even worse, as wobbly quarterly performance and weak end markets like industrial welding and automotive have discouraged investors in this volatile laser company.

Still, I think there are better days ahead for this leading fiber laser company. Fiber lasers continue to gain share in the growing laser market, and the number of applications for fiber lasers has only been increasing. Not only does IPG Photonics enjoy a strong IP position and a good reputation for innovation, but the company's vertical integration allows it to produce lasers at considerably lower costs than its rivals - leaving the company free to compete on features when it can, and price when it must.

On a cash flow basis, I believe these shares are about 25% undervalued today, and I do expect rather aggressive adoption and growth for the company over the next five and ten years. EV/EBITDA also supports the notion that these shares are undervalued, and though global industrial capex spending remains a major unknown, I believe the success of IPG Photonics is more weighted toward "when" than "if".

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IPG Photonics Looking To Innovation And Integration

Seeking Alpha: Is This A Chance To Pick Up II-VI For The Rebound?

Sometimes one of the best things an investor can do is pick up shares of a quality company on a temporary problem in the industry. For instance, investors who bought Lincoln Electric (LECO) below $40 are probably pretty happy that they did so. While the shares of laser optics and components maker II-VI (IIVI) have been volatile, they historically haven't stayed very cheap for very long. The question for investors now, though, is whether this is another buying opportunity or whether II-VI's addressable markets have changed in fundamental ways that will make this a disappointing stock from now on.

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Is This A Chance To Pick Up II-VI For The Rebound?

Investopedia: Rofin-Sinar Down On Power

Rofin-Sinar Technologies (Nasdaq:RSTI) has often been a quality small cap company that, despite a lack of institutional support (big-name sell side coverage), has often traded at pretty robust premiums. With key industrial markets in Germany and China struggling, though, these shares have had a rough go of it and have come down in value substantially. While investors should not ignore the downside of further global economic stagnation, now may be a good time to get up to speed on a stock that should be highly leveraged to a recovery in those markets.

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