Shares of IPG Photonics (Nasdaq: IPGP ) hit a 52-week high yesterday. Let's look at what's driving these gains to understand what lies over the horizon. Are there clear skies ahead?
How it got here
IPG's recent gains, driven largely by a second-quarter earnings beat and subsequent stock pop, helped reverse the stock's slide that followed fading post-earnings optimism after the first quarter. That turnaround has made IPG a very narrow leader among its peers:
IPGP Total Return Price data by YCharts.
Fool analysts John Reeves and David Meier highlighted IPG's value over Coherent (Nasdaq: COHR ) , Rofin-Sinar (Nasdaq: RSTI ) , and Newport (Nasdaq: NEWP ) last month, just after the market's initial reaction to its second-quarter earnings. Rofin-Sinar and Coherent's carbon lasers haven't advanced as rapidly as the fiber-optic technology pioneered by IPG (and since adopted by Newport, as well).
Fool contributor Brian Stoffel notes that IPG's vertically integrated operations can exaggerate macroeconomic shifts on the company's bottom line. If that's the case, the economy must have been doing rather well in the second quarter. Not only did net income rise 23%, the company's forward guidance also came in well ahead of Wall Street's expectations.
Now that we've looked at the path IPG's taken to these gains, let's dig into the numbers to find out if those gains are sustainable -- and if there might be more to come.
What you need to know
IPG isn't especially highly priced on a P/E basis, unless you compare it to the much lower valuations of peers afforded much higher forward growth rates:
Price to Levered Free Cash Flow
Net Margin (TTM)
Projected Growth Rate (2013)
Source: Yahoo! Finance. TTM = trailing 12 months.
IPG boasts the strongest net margins of the group, but one of the weaker forward growth estimates. Its price-to-free-cash-flow levels are significantly higher than its P/E, but that's the case for all but Coherent. However, those free cash flow levels have increased at a much greater rate than any peers -- and only Coherent has also seen free cash flow growth in the past few years:
IPGP Free Cash Flow TTM data by YCharts.
Unfortunately, IPG's had to issue a secondary offering to fund expansion this year, a sign of better-than-cexpected growth, but an annoyance to existing shareholders who find themselves more diluted. Free cash flow hasn't been quite good enough to allow IPG to finance its growth internally.
Where does IPG Photonics go from here? Since turning positive at the end of the recession, IPG's free cash flow growth has been the best of its major metrics, surpassing net income, which has itself grown at a greater rate than revenue:
IPGP Net Income TTM data by YCharts.
These trends point toward a future where IPG's P/E and price-to-free-cash-flow levels are more closely aligned, but it's worth watching the company's research and development investment. An insufficient dedication to technological progress may leave the company susceptible to competition from Newport or other fiber-based laser makers.
The Motley Fool's CAPS community has given IPG Photonics a perfect five-star rating. Only eight out of 450 CAPS All-Stars expect IPG to underperform the indexes in the future.
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