NASDAQ: IPGP
COMPANY DESCRIPTION
Designs, develops and manufactures
fiber lasers and amplifiers for semiconductors. IPG Photonics Corp. engages in
the design, development, production, and distribution of fiber lasers, fiber amplifiers
and diode lasers.
Its products include lasers systems,
beam delivery, medical, telecom equipment, and components such as pump diodes,
chillers, and mid-IR crystals. The company was founded by Valentin P. Gapontsev
and Igor Samartsev in 1990 and is headquartered in Oxford, MA.
RECOMMENDATION
We rate IPG
Photonics Corporation a BUY at USD 160 for a target of USD 205-208 within 3 to 4 months.
Below are the basic reasons to
recommend this stock as a BUY.
·
IPG is regarded as the pioneer and leader of the
fiber lasers technology market. The company has a dominant position in the core
material processing market on the back of its expertise in handling fiber
lasers, which are more reliable, efficient, robust, compact and easier to
operate than conventional lasers. Improvements in their output power levels and
cost, as well as superior performance and lower cost of ownership have been
driving the adoption of fiber-lasers.
·
Management noted that use of high-strength steel
and aluminum in automotive manufacturing and decreasing the weight of vehicles
are driving the use of fiber lasers over other manufacturing methods such as
stamping, non-laser welding, riveting and adhesives. Other trends, such as
miniaturization of parts and electronics are driving adoption of lasers because
no other tools can work as precisely. We believe that growing usage of fiber
laser bodes well for IPG in the long run. Moreover, the company’s strong IP
base, which includes more than 240 patents issued and over 380 pending patent
applications worldwide, is a key catalyst.
·
IPG's vertically integrated business model is a
key differentiator, in our view. This not only helps it to maintain
technological lead but also keep costs of production significantly lower as
evident from gross margin expansion over the three years. This has also aided
the company to continue investments on product development. We also note that
its research & development (R&D) expense in 2017 surged 28.4% over 2016
as compared with 24.2% in 2015. Despite this incremental investment, the
company posts industry-leading operating margin. In the long-term management
forecasts gross margin in the range of 50–55% and operating margin in the range
of 32–37%.
·
Further, acquisitions have helped the company to
expand its product portfolio. In 2016, the company acquired Menara Networks,
which helped in expanding telecom product offering to include pluggable optical
transceivers. The recent acquisitions of Innovative Laser Technologies (ILT)
and OptiGrate Corp are positive. ILT offers precision laser systems, with a
focus on the medical device industry. IPG management believes that the
acquisition will strengthen presence in the medical vertical, simultaneously
expanding ILT’s addressable market into other verticals that require precision
laser solutions.
·
OptiGrate is a manufacturer of volume Bragg
grating (VBG)-based filters and components. Bragg gratings are key components
in all fiber lasers. OptiGrate’s products enable performance improvement,
miniaturization, and cost reduction of ultrafast pulsed lasers. The company
supplies holographic optical elements to customers in optoelectronic,
analytical, medical, defence, and other industries and has strong clientele.
The addition of OptiGrate will assist the company easily develop the new
ultrafast pulsed lasers.
·
IPG is gradually expanding into new end-markets
like advanced applications (3D Printing, Cinema, and micro-materials
processing), communications and medical based on robust product portfolio and
strong intellectual property (IP). These have a total addressable market (TAM)
of $2.4 billion, which presents significant growth prospects. IPG plans to
expand the wavelengths at which its lasers currently operate soon. This
includes UV, orange, red, green lasers and mid-infrared lasers for fine and
micro processing, projection as well as other novel applications. IPG is in the
process of developing pulsed fiber lasers with ultra-short pulse durations,
pulsed and QCW lasers with high peak powers and mid infra-red lasers. We note
that revenues from advanced applications surged 148% in the latest quarter
driven by strong uptake in fiber laser technology used for R&D and defence
applications.
·
The company also reported first-sales of its RGB
laser, which is now used in cinemas by its OEM partner. Moreover, the company
is developing new medical applications using fiber lasers for urological and
dental procedures. The expansion into new end-markets will eventually lower
exposure to the core material processing market, which is positive for
investors over the long term.
LAST EARNINGS
IPG Photonics Corporation reported
second-quarter 2018 earnings of $2.21 per share, missing the Consensus Estimate by a penny. However,
earnings fared better than the year-ago figure of $1.91 per share.
Strong year-over-year growth was driven
by a surge of 11.9% in sales from the year-ago quarter to $413.6 million. The
increase can primarily be attributed to robust adoption of IPG Photonics’
high-power products. However, the figure lagged the Consensus Estimate of $418 million.
Materials processing jumped 11%
year over year, driven by strength in 3D printing and cutting applications.
Notably, it accounted for approximately 95% of total sales.
IPG Photonics is benefiting from
strong adoption of fiber lasers over conventional lasers as well as non-laser
cutting and welding equipment. According to management, secular transition to
high-powered products and increased electric vehicle battery production were
the primary catalysts behind the increased adoption of the high-powered lasers.
Robust performance in China, Europe
and Japan with strong demand across a variety of applications and industries
drove year-over-year sales growth. Apart from strong order flow, robust
integration of the company’s business model with vertically-integrated manufacturing
operation, production & operations management, customer credit management
and global administration aided growth.
GEOGRAPHICAL REVENUE DETAILS
China reported year-over-year sales
growth of 10% and represented 49.1% of total sales. Sales in Japan declined 2% from the year-ago
quarter and represented 4.7% of total sales. Sales in Europe increased 18% from
the year-ago quarter and represented 18.5% of total sales. Sales in the United
States and other North America grew 23% year over year and represented 11.5% of
total sales.
BALANCE SHEET & CASH FLOW
IPG Photonics ended the second
quarter with $1.125 billion in cash & cash equivalents and short-term
investments as compared with $1.18 billion reported in the previous quarter.
Total debt outstanding was $47.2 million down from $48 million in the previous
quarter.
The company generated $208.6
million in cash flow from operations up from the previous quarter’s figure of
$99.6 million.
During the second quarter, IPG
Photonics announced new share repurchase authorization program worth $125
million, following the completion of the previous $100 million repurchase
program.
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