Why IPG Photonics Hasn’t Held Onto Gains This Year

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Less than two weeks ago, we crossed the halfway point for 2012. Checking and worrying about your stocks on a daily basis is never a good idea -- but it’s worth checking in with your holdings every six months or so.

When it comes to manufacturing stocks, optimism has been held in check by worries of slowing global demand. Below, I’ll explain why IPG Photonics (Nasdaq: IPGP  ) , which is at the cutting edge of fiber-optic lasers, is no exception to this trend. The company has continued to produce encouraging results, but the market keeps shrugging these numbers off.  Before diving in, though, let’s take a look at how IPG has fared versus the S&P 500 in 2012.

IPGP Total Return Price Chart

IPGP Total Return Price data by YCharts

As you can see, the stock is still beating the S&P 500 this year,  which is great. But it’s down 30% since mid-February, and the company has given the market pretty great results in the interim.  Let’s look at some metrics to better figure out why this is the case.

Market Cap $ 2.1 B
P/E 16
P/FCF 45 
Revenue Growth (mrq) 23%
Earnings Growth (mrq) 29% 
Source: SEC filings, Yahoo! Finance.

Though IPG may look a little expensive on a cash flow basis, this is largely because the company is fully integrated, and there are large capital expenditures involved as it tries to expand capacity to meet demand.

The most important thing to know about IPG is that its fiber-optic technology is changing the world of lasers, which historically used carbon-based machines produced by the likes of Rofin-Sinar Technologies (Nasdaq: RSTI  ) and Coherent (Nasdaq: COHR  ) . Though they started out being less powerful and efficient, fiber-optic lasers have made staggering advances that have completely disrupted the industry.

The company actually got out to a quick start in 2012. not because of an earnings release, but due to a presentation at an investor conference that convinced others that the stock was underpriced relative to its potential.

IPG also impressed investors when it came out with first quarter earnings in May.  Not only did profit increase at a faster pace than impressive revenue growth, but the company gave a rosy outlook moving forward.

So why is the company down? Though IPG was the first-mover in the industry, Newport Corporation (Nasdaq: NEWP  ) and JDS Uniphase (Nasdaq: JDSU  ) have entered the fray with fiber-optic lasers of their own. But this alone doesn’t account for the stock’s fall since February.

It has to do with the company’s unique business model, and how it interacts with macroeconomic shifts.  Because it’s a vertically integrated company -- it manufactures all the parts used in its lasers, instead of buying them from someone else -- IPG does very well in boom times, but can struggle when the economy heads south. 

About 84% of IPG’s revenues come from companies using the lasers for materials processing. This means that lasers are used for cutting and welding of large sheets of metal for manufacturing. The auto industry production line would be a perfect example of how the lasers are used.

But these businesses are highly sensitive to economic cycles. With three big uncertainties looming over the global market, investors just haven’t been willing to put their faith behind the company. Personally, I think long-term investors shouldn’t heed such worries, and I’ve backed that sentiment up in both my personal portfolio, and on my All-Star CAPS profile.

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Fool contributor Brian Stoffel owns shares of IPG Photonics. You can follow him on Twitter, where he goes by TMFStoffel. The Motley Fool owns shares of IPG Photonics and Rofin-Sinar Technologies. Motley Fool newsletter services have recommended buying shares of Rofin-Sinar Technologies and IPG Photonics. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2012, at 9:49 PM, chicgoods124 wrote:

    welcome to our store:

  • Report this Comment On July 15, 2012, at 4:10 AM, bhsguy wrote:

    Good idea to check your stocks every 6 months or so. That's a joke right.

  • Report this Comment On July 16, 2012, at 12:35 AM, dstb wrote:

    IPGP has a valuation problem. It's low cash flow is not just a function of large capex but significant increases in receivables and inventory. This is not a one or two year thing but consistent for them. In fact I've seen very few companies whose cash flow is consistently so much below earnings. I like their product and their growth but this stock will have to get very cheap on a P/E basis before I will pull the trigger.

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