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

IPG Photonics Tripped Up By Some Familiar Themes

Advice like “wait for a pullback” or “buy the dip” is easy to write, but harder to follow. That’s particularly true for growth darlings like IPG Photonics (IPGP) that don’t so much pull back as tumble out of bed when they come up short on growth. And that’s where IPG Photonics sits today – down almost 40% from its 52-week high as the company guided to single-digit revenue growth for 2018; the first year in a long time that the company won’t produce double-digit growth.

Is it the end of IPG Photonics as a growth story? I don’t think so. The competition has continued to improve its own fiber laser offerings, and IPG is looking at weaker demand in some market segments, but the arguments for fiber lasers remain compelling and there are still opportunities for IPG to benefit from new market entry/conversion and ongoing upgrades to new technology. Chinese machine tool demand could be problematic in the short term, but if IPG can leverage mid-single-digit revenue growth into double-digit FCF growth, today’s price looks like an interesting opportunity.

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IPG Photonics Tripped Up By Some Familiar Themes