A Turn In Short-Cycle Industrial Demand Only Adds To IPG Photonics' Challenges

IPG Photonics (NASDAQ:IPGP) has continued to have a difficult time of it. Russia’s invasion of Ukraine, and the sanctions that followed, were always going to make 2022 more challenging for the company, but IPG Photonics has also had to deal with interruptions in China’s economy from its COVID-19 policies, as well as emerging weakness in many short-cycle industrial markets.

I thought IPG Photonics had some high-risk contrarian attributes roughly a year ago, but the shares have lost another quarter of their value, lagging the broader industrial space, but performing more in line with nLIGHT (LASR) and Chinese laser rivals Han’s Laser (002008.SZ) and Raycus (300747.SZ). At this point, I do see elevated risks to short-cycle demand, but I also think the share price discounts a lot of that. I’m reluctant to double-down on a “buy” call that has failed, but mid-single-digit growth can support a double-digit return from here, and I don’t think that’s an overly demanding outlook.

 

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A Turn In Short-Cycle Industrial Demand Only Adds To IPG Photonics' Challenges

IPG Photonics Hit Hard By Ongoing Share Loss And Global Tensions

 

Going positive on IPG Photonics (IPGP) back in August has turned out to be a bad call. Not only has geopolitical tension with Russia created worries about how IPG Photonics could be impacted by potential sanctions against Russia, but the company appears to be losing even more share in China, and management is now talking about 2022 as a "reset" year for the business at a time when short-cycle industrial companies are doing rather well from a revenue perspective.

IPG shares are definitely beaten down, falling almost 20% from the time of that last article and trading at a forward multiple that the shares haven't seen in approximately six years. I think there's still some appeal here for patient contrarian investors, but one of my long-time concerns about the company - growing competition from Chinese fiber laser companies - is still very much in play and I think investors need to be aware of the risks around this business.

 

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IPG Photonics Hit Hard By Ongoing Share Loss And Global Tensions

After A Sharp Drop, IPG Photonics Is Worth Another Look

 

Second quarter earnings at IPG Photonics (IPGP) didn’t bring much happiness to investors, as weaker than expected results and a meaningful downward guidance revision hammered the stock. Still, I think it’s well worth noting that the stock was already weak going into earnings – underperforming the broader industrial sector by about 20% – and I’m starting to wonder if the company/shares have matured to a point where the market treats it like another short-cycle stock to be rotated away from when the manufacturing PMI tops 55.

I remain concerned about the risks to IPG’s business from improving Chinese offerings, but the company also deserves credit for its own internal innovation and its superiority in high-value areas, including pulsed green lasers used to manufacture EV batteries and solar panels. If IPG is still capable of long-term revenue growth in the high single digits and can deliver 20%-plus FCF margins, these shares offer interesting upside at today’s price.

 

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After A Sharp Drop, IPG Photonics Is Worth Another Look

IPG Photonics Getting A Little Too Much Love Now

Fiber laser leader IPG Photonics (NASDAQ:IPGP) has quite a track record - not many companies manage a decade-plus of double-digit revenue growth, nor consistent mid-teens-or-better FCF margins, to say nothing of strong returns on capital and assets during more normal business conditions. On top of that, internal diode development and sourcing capability has long been a key competitive advantage for the company, allowing it to set the pace for innovation while maintaining very good margins.

In the near term, it gets better. IPG's revenue has long been driven by industrial capex cycles, and I believe we're in the early stages of a strong capex upswing - one that could be extended further if there is meaningful reshoring (or even just near-shoring) of manufacturing capacity. Opportunities in EVs, solar, and additive manufacturing only add to the longer-term potential.

The "but" is valuation. I don't believe IPG Photonics should trade like an industrial growth stock (where valuation is barely a concern). I'm likewise concerned that the Street is a little too blasé about the risk of meaningful price/margin pressure from its largest rival in China. While I do think that IPG merits a premium and offers good leverage to industrial capex growth, I think the current share price reflects that and doesn't leave an especially exciting, long-term expected return for investors.

 

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IPG Photonics Getting A Little Too Much Love Now

IPG Photonics Struggling To Offset Weaker End-Market Demand And Stronger Competition

One of the most perilous times in a company’s publicly-traded life cycle is when it transitions from being a differentiated break-out growth story to a more “regular” type of company with more competition and less capacity for differentiation. Often there are many investors who are unable (or unwilling) to see the change and they’ll respond to any sell-offs or criticism with “just buy it and don’t worry”.

I’ve heard exactly that in response to past articles on IPG Photonics (IPGP) highlighting the increased competition the company is facing and the challenges in finding new markets where the company can really stand out with its technology (and garner premium pricing). And yet, the shares are down about 20% from my last update (where I suggested the valuation was too high), and estimates are quite a bit lower now as well.

I don’t hate IPG, and the valuation is a lot more reasonable now, but those core challenges with rising competition and more difficult differentiation remain in place. While there is still a long runway for laser adoption in a range of markets (including core welding/cutting), more and more of that opportunity is going to go to lower-priced rivals in China. Still, I like the company’s leadership in areas like high peak power lasers and its opportunities in markets like sensors, instrumentation, defense, and medical technology, and I think these shares are worth another look now.

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IPG Photonics Struggling To Offset Weaker End-Market Demand And Stronger Competition

IPG Photonics Takes A Volume Hit From Weaker Margins, And Competition Is Still A Real Threat

Even relative to the strong rally in industrials and the market in general so far on a year-to-date basis, IPG Photonics’ (IPGP) performance has been exceptional, as investors are clearly willing to look ahead and build in a recovery for machine tools later in 2019. I think this enthusiasm may be overdone, though, as although the market in China does indeed appeal to be stabilizing, competition continues to be a long-term threat to IPG’s volumes and margins.

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IPG Photonics Takes A Volume Hit From Weaker Margins, And Competition Is Still A Real Threat

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

Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

If fiscal third quarter results are a fair indication, it looks like my concerns about a slowdown in business at Hurco (HURC) ahead of a major fall tradeshow were misplaced. Although Hurco did see some sequential slowdown in orders, that’s not uncommon in the summer and the business overall seems to be in good shape, while industrial customers continue to look to add production capacity.

Experienced investors know that the good times for Hurco, DMG Mori (OTCPK:MRSKY), Milacron (MCRN) and other industrial equipment manufacturers won’t last forever, but this latest earnings cycle has offered more positive commentary compared to earlier this year and many manufacturers are bumping into capacity constraints. While global trade tensions are a threat, and I wouldn’t go too far out on a limb to chase Hurco, I don’t think the cycle is over just yet.

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Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

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

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

Even As China Looks Toward Automation, FANUC Seems Pricey

Fanuc (OTCPK:FANUY) (6954) is a pretty remarkable company and a testament to the value of figuring out those things you do very well and then just doing those things. There are good reasons that Fanuc is the global leader in factory automation equipment like CNC systems, robots, and controlled machine tools. Likewise, operating margins in the 30%'s don't come by accident, nor do returns on capital consistently ahead of the cost of capital.

All of that said, I can't love the stock right now. Yes, I own ABB (NYSE:ABB) shares and I'm sure there will be aficionados of lead paint lollipops to accuse me of talking down Fanuc because that will somehow "help" ABB. But the fact remains that capex investment related to smartphones is still soft, China is increasingly looking to homegrown automation solutions, and even growth assumptions in excess of what I project for ABB aren't enough to drive a compelling fair value for this industrial technology company.

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Even As China Looks Toward Automation, FANUC Seems Pricey

Lincoln Electric Nearing The Bottom, But The Market Has Responded

The market often anticipates significant changes in direction, and so it's not surprising to see that Lincoln Electric (NASDAQ:LECO) shares have been strong in anticipation that the fourth quarter of this year will see a return to reported revenue growth. The shares are up about a third from when I last wrote (amid the deep gloom in the markets at the start of the year), and there have been some encouraging notes - Halliburton (NYSE:HAL) thinks the worst is over in the North American energy market, non-residential construction continues to grow, and although metalworking tool demand hasn't improved, it does at least seem consistent now.

Lincoln Electric is one of my favorite companies, but the shares don't often get all that cheap - that big pullback in late 2015/early 2016 was one of those rare opportunities to get in at a better valuation. I still believe that Lincoln Electric is a mid-to-high single-digit grower long term and has little to fear from Colfax (NYSE:CFX), Illinois Tool Works (NYSE:ITW), or other welding companies. If you can be happy with a high single-digit gain, with a little dividend yield on the side and perhaps some upside from automation and advanced welding tech, there's still a reason to keep this name in mind.

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Lincoln Electric Nearing The Bottom, But The Market Has Responded

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: Lincoln Electric A Lion In A Very Harsh Winter

There are some questions investors learn not to ask, and "how much worse can it get?" is most definitely at or near the top of the list. Operating conditions for Lincoln Electric (NASDAQ:LECO), the leading producer of welding equipment and consumables in North America, were already looking rough in the middle of 2015, but conditions have gotten even worse on a deeper plunge in overall manufacturing activity.

Many industrial companies, particularly in the machinery space, have gotten the snot knocked out of them since the summer of 2015 and I think there are some long-term values in the sector. Lincoln Electric looks like one of them, but I can't state with any real confidence that my estimates are finally low enough. I think a buyer of Lincoln Electric shares today will be happy to own them in three years' time, but I can't say that they'll be happy to own them in six months, and that is a key issue with any buy recommendation in the machinery space - while I think many high-quality names are attractive for the long term, things can certainly get worse in the meantime.

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Lincoln Electric A Lion In A Very Harsh Winter

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: Lincoln Electric Trying To Manage The Nearly Unmanageable

Between the well-telegraphed declines in oil/gas and shipbuilding and the emerging weakness in heavy manufacturing seen through the reports of companies like Kennametal (NYSE:KMT) and MSC Industrial (NYSE:MSM), the writing was on the wall for Lincoln Electric (NASDAQ:LECO). This well-run welding company is managing the downturn as best it can, but there's only so much the company can do when there is weakness on multiple fronts and little-to-no visibility regarding a turnaround.

Conditions can certainly get worse, but I would like to think that the shares already reflect a pretty unpleasant scenario. My base case fair value on the shares is around $67, but another 10% cut to 2015 and 2016 expectations would still suggest today's price is about 5% too low. That's not quite "heads I win; tails I don't lose", but it's close enough to have my bumping this name up my watch/buy list as short-term problems muddy the waters for a proven performer.

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Lincoln Electric Trying To Manage The Nearly Unmanageable

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