This Laser King is Poised for a Rally

By Piyush Arora - October 16, 2012 | Tickers: COHR, IIVI, IPGP, NEWP, RSTI | 0 Comments

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With the recent market rally, finding undervalued growth stocks has become more difficult. Well it’s difficult, but not impossible. Industries have moved onto robotic welding, etching and cutting machines for precision. Gas lasers which were earlier used on a large scale for these operations are being rapidly replaced by fiber laser technology. This brings the pioneer of the technology IPG Photonics (NASDAQ: IPGP) into the limelight.

IPG Photonics which was founded in 1998 is a large scale manufacturer of fiber lasers, fiber amplifier and diode lasers. The laser products offer 0.5 microns to 2 microns of laser wavelength, which consume as low as 1 watt. Additionally the fiber laser cutting machines do not use any consumables, and cost much less than the gas cutting peers. The technology has been in the market for the last 20 years, but it is the recent technology improvements that brought its costs down.

The technological improvements and the low costs which give IPG Photonics the competitive edge. Most of the competitors lag the laser offerings by IPG Photonics, by up to 40% on price to performance basis. The company recently acquired laser systems provider, J.P Sercel Associates. Through this acquisition, the management expects to further cut down the operating costs and improvise on productivity, which would further strengthen IPG Photonics competitive advantages.

In the recent quarterly results, the company reported a 13% increase in sales of high powered lasers and medium powered laser sales surged 32%, compared to the year ago quarter. The second quarter earnings increased by 23% which beat the street’s estimates. Management expects EPS for the current quarter to be $0.74 to $0.84 on revenues of $145 million to $155 million.

The company shares its market space with Coherent (NASDAQ: COHR), Newport Corp (NASDAQ: NEWP), Rofin-Sinar Technologies (NASDAQ: RSTI) and II-VI (NASDAQ: IIVI).

Almost all the competitors operate with low debt/equity levels, except for Newport. IPG Photonics has the lowest PEG of 0.8x, which indicates that the stock is fairly undervalued keeping the growth prospects of the company in mind. Additionally IPG Photonics enjoys the highest net profit margins, and the highest returns on its equity. Analysts expect the EPS growth of IPG Photonics for the next 5 years to be around 26%, meaning the EPS could nearly quadruple in the period on a compounded basis.

Additionally if we take a look at the stock performance of the stocks over the last 5 years, we can see that IPG Photonics has outperformed its peers by a significant margin.

 It is the weak macroeconomic conditions that remain a cause of worry. Industries looking to save costs on cutting and welding operations are expected to shift to fiber laser technology. If the stimulus packages around the globe can kick up the infrastructural spending, IPG Photonics could have a jackpot ride. The stock has stellar stock performance and great financials. The fundamentals of the company also look great, and it is due to these reasons, I am compelled to give IPG Photonics a Foolish Buy Rating.

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