A Laser Precision Investment Decision
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the simplest ways to get an overview of a company's operations is through a SWOT analysis. Here, the main strengths, weaknesses, opportunities, and threats of the company are laid out for all to see. Having dropped 15% on negativity surrounding a downgrade from Stifel Nicolaus and a slight earnings miss, fiber laser producer IPG Photonics (NASDAQ: IPGP) has seen happier days. However, with guidance largely in-line with analyst's expectations for 2013, I decided to run a SWOT analysis on the cyclical company to determine if the recent sell-off had been overdone.
Disruptive Technology- Ranging from its best in class power, beam quality, or even cost of ownership, IPG's fiber laser technology is the true leader of its space. This groundbreaking technology has been adopted by a number of major manufacturing companies, including: Caterpillar, GM, Chrysler, Foxconn, GE, Boeing, and even Gillette and their razors.
Strong Core Business- The company's materials processing segment accounts for 87% of overall revenue and was able to deliver year-over-year growth of 14% in the 4th quarter. Furthermore, high power lasers, which account for 48% of overall revenue, jumped 10% year-over-year as well, showing a strong core business for IPG.
Vertical Integration- Boasting a strong, vertically integrated business, IPG has watched its Gross Margin and Operating Margin expand to 52% and 38%, respectively -- margins that lead their industry. With this strength, the company is able to meet demand more rapidly than its peers and delivers "thousands of lasers with very short lead times." Such a feat creates an enormous moat and gives IPG what it calls a "defensible laser position."
Huge Growth Rates- Posting 5 year and 10 year revenue growth rates of 19% and 32%, respectively, the company has been historically successful boosting sales. Similarly, EPS has grown 29% yearly over the last 5 years and the company has seen its Book Value per share double since 2010.
European Exposure- 40% of IPG's revenue comes from Europe, leaving it susceptible to any further downturns as they try to get their economy back on track. Despite the well publicized struggles overseas, the company was able to boost their year-over-year 4th quarter results by 5%, powering through what could have been a weak season.
Recession Struggles- Most, if not all, businesses struggled during the recession, and IPG certainly was no exception. Posting an EPS decline from $0.79 per share in 2008 to $0.12 in 2009, the company was forced to watch as sales dried up and plummeted over 15% in the same time frame. However, with their stability in Europe during their massive struggles, one could argue that they are a recession-safe stock regardless.
Cutting Capabilities- CFO Tim Mammen stated that currently only 20% of all lasers in the overall laser market are used for their cutting capabilities. The company sees this market essentially tripling to a 50%-75% mark in just 3 to 5 years, representing a huge growth runway for the company's largest segment.
Medium Power Lasers- Despite accounting for only 7% of IPG's revenue, medium power lasers represent another major growth runway for the company. Used in the cutting and of welding thin materials, the medium power and QWC lasers offer a high margin opportunity and saw sales growth of 29% and 74% year-over-year, respectively.
A Growing Niche Market- The overall laser market is set to grow from $3.8 billion in 2011 to $4.8 billion in 2015, according to IPG. Perhaps more importantly, the Fiber Laser market is projected to jump from $588 million to $1.4 billion over the same time . Representing 23% yearly growth, the company is in a great business niche moving forward.
Asia- Representing IPG's largest geographical segment with 41% of overall sales, the Asian segment's 4th quarter jumped 36% compared to last year's numbers. By vastly expanding their "sales and management capabilities" in the area, they see 2013 as being even stronger than 2012. Seeing an abundance of OEM's in the Asian market, the company's sales of high power lasers should continue to grow far into the future.
Fanuc Corporation (NASDAQOTH: FANUY)- Competing against IPG with its high power CO2 and solid state lasers, Fanuc is one of the company's largest competitors, as it holds a market cap in excess of $30 billion. Targeting many large automakers and Asia's OEMs as a whole, Fanuc represents some major competition to IPG. Furthermore, as they help create the casing for the aluminum iPhone casing, they have established themselves in many of IPG's arenas.
Rofin-Sinar Technologies (NASDAQ: RSTI)- Perhaps IPG's most direct competitor, Rofin-Sinar creates high power CO2 and solid state lasers, mid and low power CO2 and solid state lasers, and fiber lasers. With these 3 competitive areas offering the bulk of IPG's operations, Rofin-Sinar is a name that the company will continue to see for the long-term future. However, as Brian Stoffel explained, IPG's fiber optic lasers are still considerably cheaper than the carbon operated lasers from Rofin-Sinar and Coherent.
Coherent, Inc. (NASDAQ: COHR)- Speaking of Coherent, we have yet another competitor in IPG's fiber laser space, although their lasers are carbon based, as previously mentioned. Despite having a more expensive fiber laser, Coherent has been given a 5 star review by the critics on CAPS. Posting results that beat the Street in January and acquiring two small laser manufacturers in the most recent quarter, the company could be poised to truly compete with IPG.
JDS Uniphase (NASDAQ: JDSU)- Finally, with JDS Uniphase, IPG has a company who may just represent its best competition in the fiber laser market. After beating expectations and increasing margins, JDS looks poised to continue eating into some of IPG's Asian market share. Along with Newport Corporation, JDS Uniphase offers the the toughest geographic and operational competition in the fiber laser arena.
Easily coming in first with the best growth rates of the group, IPG shows that it has separated itself from the field. With its vertical integration allowing for a huge 26% profit margin, the company's current valuations offer an amazing opportunity to buy growth at a low price. Posting valuations in line with its peer group, IPG's growth appears quite cheap. With JDS Uniphase's inability to remain profitable, Coherent's wildly erratic earnings, Rofin-Sinar's sharp downturn during the recession, and Fanuc's slow but steady growth rates, I see IPG Photonic's fast growth as the most appealing opportunity in the laser technology industry.
joryko has no position in any stocks mentioned. The Motley Fool recommends IPG Photonics and Rofin-Sinar Technologies. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!