It’s a well known fact that disruptive innovations take a long time before they gain acceptance on a large scale. Call it inertia or fear, industrial processes mostly use tried and tested technologies, which further extend the fertility period of disruptive businesses. One such company is IPG Photonics Corporation (NASDAQ:IPGP), which has been in business since 1990. But it is only now that the company is receiving its due attention.
IPG Photonics Corporation (NASDAQ:IPGP) is the leading manufacturer of fiber laser and fiber amplifiers and diode lasers. Its revolutionary fiber cutting lasers perform cutting and etching tasks with great precision, and all that is done without using any consumables. Since product designs are becoming complex with constrained manufacturing budgets, the need for cost savingprecision tools is rapidly increasing.
Going great
Thanks to the recovery in the automobile and the aerospace industry, the demand for cutting, welding, and etching lasers has been increasing rapidly over the last couple of quarters. As a result, IPG Photonics Corporation (NASDAQ:IPGP) posted a 29% surge in quarterly sales from its materials processing division (which accounts for 94% of its overall revenue).
Extending its lead, IPG Photonics also manufactured the first 100 kilowatt laser, which has set an industry wide record for a high powered laser. The order was received in November last year and the swift manufacturing and delivery is another great achievement.
IPG Photonics Corporation (NASDAQ:IPGP) has also found growth even in the financially troubled countries of Europe. Its quarterly sales in the continent were up 8% year over year despite a major slowdown in the European manufacturing sector. Besides that, IPG Photonics signed an important contract with a leading automobile manufacturer in Europe which is supposedly IPG Photonics’ biggest automobile contract ever.
The company would also be revolutionizing the textile and materials industry. According to claims, IPG Photonics has developed a technology that allows welding clear-to-clear polymers which are invisible to the human eye. This development is expected to pave way for new materials and industrial fabrics, and strengthen the position of IPG Photonics in the industry.
Numbers game
Although II-VI, Inc. (NASDAQ:IIVI) and Coherent, Inc. (NASDAQ:COHR) also manufacture industrial grade lasers, a study found that the competitors of IPG Photonics lagged by up to 40% in terms of efficiency and offer 50% lower beam quality.
The fiber laser industry is being covered by several investment research firms, and a couple of popular research firms have downgraded II-VI, Inc. (NASDAQ:IIVI). Analysts feel that although the company has modest cash flows and acceptable debt levels, its ROE and operating efficiency are not at par with its peers.
As of now, IPG Photonics Corporation (NASDAQ:IPGP) enjoys an ROE of 20.99% while II-VI, Inc. (NASDAQ:IIVI) and Coherent have an ROE of 8.19% and 8.9%, respectively. ROEs display the depth and competence of management which in turn decides the fate of a rapidly growing company.
But even with a relatively lower ROE, Coherent has been able to grow at a rapid rate. Its five-year average EPS growth averages around 39% as compared to II-VI’s 8.1% and IPG Photonics’ 34%. This is partly because of its relatively smaller size, but mainly due to its acquisition spree.
In November last year, Coherent acquired Innolight Innovative Laser and Systemtechnik GmbH and Midaz Lasers Ltd. And in December, the company acquired Lumera Lasers. Coherent has been growing inorganically, but is low ROEs suggest that the company is yet to combine the synergies of its acquisitions.
However, for the next five years, analysts estimate the annual EPS growth of Coherent to average around 12.5%, 13% for II-VI, Inc. (NASDAQ:IIVI) and 26% for IPG Photonics. These growth estimates leave little reason to look beyond IPG Photonics in the industry of lasers.
Final words
Besides that, IPG Photonics has also earned a reputation of delivering large product shipments in a timely and scheduled manner. This is because IPG Photonics has relatively larger production facilities due to which it can manufacture industrial lasers in large numbers. Since most of its peers have limited production facilities, they aren’t able to deliver large shipments as quickly as IPG Photonics. This type of timely and scheduled delivery discipline has taken IPG Photonics way ahead of its peers.
Shares of IPG Photonics Corporation (NASDAQ:IPGP) have risen around 27% over the last year, but have slid by nearly 16% this year. In my opinion, this presents a good buying opportunity considering the fact that major investment research firms, have an outperform rating on IPG Photonics with price targets ranging from $68-$74.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends II-VI and IPG Photonics. The Motley Fool owns shares of IPG Photonics.
The article An Industrial Play That Will Continue to Rule the Laser Industry originally appeared on Fool.com.
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