IPG Deserves Closer Look After Mass Sell Off
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IPG Photonics (NASDAQ: IPGP), a developer and manufacturer of a broad line of high-performance fiber lasers, fiber amplifiers, and diode lasers, has had a very diverse experience over its past five-year operating history.
After 20 years of perfecting its core fiber laser product line – investing heavily to reduce the technology’s cost of ownership and growing its wide base of blue chip customers – the corporation experienced a dramatic revenue and per share price drop in 2009 as end-users significantly cut back on their capital spending plans. Following in tandem with the corporation’s post-recessionary top line resurgence, which grew from $185.9 million in 2009 to $474.5 million in 2011, IPG’s per share price also pleased investors with a near 10x gain when it reached its five year high near $75 per share last June.
Due to the continued worries stemming from the European debt crisis – close to 40% of IPG’s revenues are European-based – and the potential for capital spending habits to once again contract in the near future, the corporation’s stock price has once again taken a significant hit, falling over 46% since last year’s high. This time around, however, IPG is in its most attractive financial position that investors have ever witnessed. The prospect of continued adoption of the corporation’s fiber laser technology as well as in-house efficiency improvements, coupled with the recent price contraction, makes IPG a must-see player in the swiftly growing laser industry.
Widespread Use of Fiber Laser Technology
Fiber laser technology originally dates back to the early 1960s, but has only very recently become an attractive option for manufacturers due to the significant drop in cost and the simultaneous improvement in the technology’s power and efficiency. The technology enjoys many key advantages over the competing technologies historically used in manufacturing jobs -- i.e. CO2 and crystal lasers.
- Efficiency: Electrical efficiency of fiber lasers are close to 30%, which compares with efficiency levels as low as 2% and as high as 15% for other options that have historically competed with the technology.
- Output: More uniform output beams lead to greater quality cuts and welds that require less time. Users of the fiber lasers can therefore enjoy a significantly higher throughput of their products on the production lines.
- Smaller Footprint: Fiber provides for more compact lasers that are virtually maintenance free. Individual optical components do not require replacement, and the technology has experienced dramatic price drops to the point where replacing lasers is cheaper than repairing degraded optical components. Users of fiber lasers, therefore, enjoy the technology’s lower cost of ownership almost immediately.
Diversification and Strong Financial Position
Due to the widespread benefits of fiber technology and the diversity of the technology’s wavelengths (and, therefore, end-use applications), IPG has enjoyed customer growth in many different markets. The vast majority of the corporation’s revenues stem from material processing (around 91% of total), yet within the niche IPG has an attractively diversified customer portfolio. Automotive corporations including General Motors (NYSE: GM) and Volkswagen (NASDAQOTH: VLKAY), consumer products players including Gillette (NYSE: PG), Foxconn, and Panasonic, and heavy manufacturers including Boeing (NYSE: BA), Pratt & Whitney, and NASA, all use IPG’s fiber lasers for materials cutting, welding, engraving, and hardening.
Likewise, significant future growth will also stem from players that require more delicate laser outputs – wafer processors in the semiconductor industry and skin rejuvenation, wrinkle removal, and general surgery in medical fields are all fast growing and up-and-coming niche markets.
IPG’s financial performance has dramatically improved as technology adoption has become more widespread. The corporation has benefited from significant sales leverage, and as a result has enjoyed almost effortless subsequent sales to specific end-users after initial sales are made. Certain automotive customers who qualified for the fiber laser products in 2007-2008 period, for example, have gone on to purchase more than 70 additional lasers from IPG to outfit additional production plants with the more efficient technology. IPG has, as a result, grown operational income much faster than top line revenue over the past several years (39.5% CAGR and 25.9% CAGR, respectively, between 2007 – 2011).
Significant Growth
One of the hallmarks of the fiber laser industry and an investment in IPG is rapid growth. As the technology continues to improve on a cost and applications basis, fiber penetration within certain manufacturing industries and the number of uses in which fiber is a viable solution will also continue to grow.
Between 2007 and 2011, for example, the fiber laser industry grew from $200 million to $588 million (30.9% CAGR), and went from representing around 5.7% of the entire laser market to around 15.5% over the same time period. As the industry leader, IPG retained a vast majority of the industry growth – revenues grew from $188.7 million in 2007 to $474.5 million in 2011, for an average annual growth rate near 26%. Company management expects fiber to dramatically increase its penetration of the entire laser market over the mid-term, although at a somewhat subdued pace. By 2015, fiber will represent close to 29% of the entire laser industry and will be a $1.4 billion business. Growing at a near 24% CAGR between 2011-2015, IPG is on the path to hitting more than $1 billion in annual revenues by the middle of the decade. This is not too shabby considering the corporation’s current enterprise value of $1.8 billion.
More and more dollars from IPG’s top line are also expected to hit lower tiers on its future income statements. The corporation has driven down a diode’s cost per watt from around $80 in 2003 to less than $3 in 2011. Gross margins over the past five years alone have expanded more than 1,000 basis points, and IPG management has reconfirmed its mid-term estimates that margins will remain relatively steady at current levels. Likewise, due primarily to the sales leverage explained previously, operating margins have also grown in tandem with the gross margin expansion. Between 2007 and 2011 operating margins expanded close to 1,300 basis points to hit 37%, giving way for an additional $60 million flowing down to the operating income line in the latter year.
IPG’s consensus earnings estimates for the next two years have actually enjoyed a slight increase over the past several months despite the corporation’s huge per share price drop. At current prices around $41/share (early in the week of June 25), IPG trades for less than 13x next year’s earnings estimates. This represents a significant price multiple contraction when compared to the five year P/E average in excess of 38x.
A Purchase?
The huge price drop experienced over the past quarter, especially when coupled with the corporation’s mid-term growth prospects, definitely creates a potentially attractive investment scenario for IPG stock. The investment, of course, is by no means a riskless venture with close to 40% of revenues stemming from Europe and a heavy reliance on capital-intensive businesses in the automotive and heavy manufacturing industries. Similarly, due to the vertically integrated nature of IPG’s business, the corporation is also subject to a meaningful degree of fixed costs. As laser prices continue to decrease and more competitors enter the field, it will be increasingly difficult to sustain current operating margin levels.
Despite the downsides, IPG, as the current industry leader, is subject to huge growth over the mid-term as adoption of fiber technology expands. Selling for a third of its historic P/E average, IPG at least deserves a look after its huge sell-off over the past quarter.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Procter & Gamble Company. Motley Fool newsletter services recommend General Motors Company and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
