Is This Laser Manufacturer a Buy?
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The increased usage of laser technology within the consumer, industrial, and medical industries has boded well for IPG Photonics (NASDAQ: IPGP). IPG is known for manufacturing the groundbreaking fiber-based laser.
Lasers have progressed substantially since they were first operated by Theodore H. Maiman in 1960. Today, traditional laser technologies are based on CO2 and yttrium aluminum garnet (YAG), which combine to create the high-powered beam. The increased usage of laser technology within the consumer, industrial, and medical industries has boded well for IPG Photonics (NASDAQ: IPGP). IPG is known for manufacturing the groundbreaking fiber-based laser.
IPG’s fiber lasers are greener than conventional lasers, as they (1) are up to 15 times more efficient than traditional peers, (2) offer lower electrical consumption, (3) have lower cooling requirements, (4) are more versatile, and (5) use no consumables (such as for replacing lamps or bars).
This superior laser technology is not too good to be true. IPG has over 200 patents helping them sustain a competitive advantage for their low-cost/high-efficiency products. IPG’s competitors have found ways to dodge these patents and produce fiber-based lasers, but IPG remains the world leader in this emerging technology. The table below shows how IPG fares with rival laser companies Coherent (NASDAQ: COHR), Rofin-Sinar Technologies (NASDAQ: RSTI), Newport (NASDAQ: NEWP), and II-VI (NASDAQ: IIVI).
When comparing these numbers, it’s important to take into account the fact that that IPG has the longest history and the largest market share in its industry. But that doesn’t mean that the company has the sector all to itself. For instance, Coherent will formally release a high-power fiber laser platform, with the first volume orders expected in fiscal 2013. Rofin-Sinar made acquisitions to build their first fiber-based laser platform, which has helped the company grow revenues quite substantially in 2012. Newport also made a few acquisitions earlier this year that helped expand their fiber-based laser product offerings. And last but not least, II-VI produces tools for laser material processing, including modular laser processing heads for fiber lasers.
Looking at the valuation metrics, IPG is more expensive than all of its competitors. Shares of the company are trading at 22.34 times earnings and 5.79 times sales, and it has an EV/EBITDA of 12.22. Newport is the cheapest among these companies and is trading at 7.66 times their earnings, 0.77 times their sales, and they have an EV/EBITDA of 7.12.
IPG has grown revenues faster than all its competition, sporting a five year compound annual growth rate of 27.1%. This is nearly double that of II-VI, and dwarfs Coherent, Rofin-Sinar, and Newport, each of which sport a 5-year CAGR in the single digits. The world leader in fiber based lasers also excels over its rivals in terms of ROA, ROE, profit margin, and operating margin, with Newport being the least efficient from an ROA and operating margin standpoint. Rofin-Sinar isn’t too much better, as the company is in the bottom two in every category.
Taking a look at shareholders, Dr. Valentin P Gapontsev is the founder, chairman and CEO of IPG and owns approximately 38% of shares outstanding. Chuck Royce, the manager of Royce & Associates, is the most bullish hedge fund in IPG. Royce increased his position in IPG by 55% from the first to the second quarter, and reported owning nearly 2.2 million shares in his most recent 13-F filing with the SEC. As we can see in the “YTD return” in the graph above, Royce has to be happy with his decision to increase his position in IPG.
After beating both of its top and bottom line estimates for the third quarter of 2012, shares of IPG shot up over 34% and reached a 52-week high at $65.77. IPG has performed extremely well throughout the entirety of 2012, but risks do lie ahead for the company. Roughly 30% of its revenue comes from Europe, competitors have made advances in fiber lasers, and its CEO has significant influence on the company and could block any potential buyout. Although IPG isn’t cheap by most standards, they have a superior product and have been crushing the competition for so long that it’s tough to ignore.
This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of II-VI, IPG Photonics, and Rofin-Sinar Technologies. Motley Fool newsletter services recommend II-VI, IPG Photonics, and Rofin-Sinar Technologies. 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.