Why I'm Buying Shares of IPG Photonics Corporation

In a richly valued market, this company with lots of potential is still fairly valued.

Aug 11, 2014 at 2:15PM

The future of manufacturing is here, and I plan on owning one of the companies poised to benefit the most.

Fiber optic lasers are the wave of the future, with their ability to cut and weld huge pieces of metal while using up less energy and being more reliable than the standard carbon dioxide-based lasers that have been used for decades. 

Screen Shot

Source: IPG Photonics 

Though there are several companies that offer fiber lasers, IPG Photonics (NASDAQ:IPGP) was the first-mover in the industry, and it remains the only player that is both vertically integrated, and solely focused on the technology.

How IPG fits into my portfolio
For over three years, I've been calling out one company every month that I'm putting my Roth IRA money behind. Over that time, this portfolio has returned 36%, far outpacing the S&P 500, which has returned 24% over the same time frame.

Currently, IPGP makes up 8% of my IRA -- which is a lot -- but I think the opportunity here is too good to pass up. The company offers exposure to the manufacturing sector, has broad geographic diversity, and is fairly priced. Read below to get more details.

Going after material processing OEMs
Usually, it's a good thing to diversify one's business as much as possible. But with IPG, the focus has become narrower and narrower -- and it's not necessarily a bad thing. Original equipment manufacturers, or OEMs,  have long used carbon dioxide  lasers or other precision cutting devices in order to cut or weld large pieces of metal.

Fiber lasers, which IPG specializes in, are far stronger, efficient, and cost effective than traditional cutters/welders. This has presented a unique opportunity for IPG: OEMs represent lucrative, repeat business that is up for grabs.

In 2009, IPG got 76% of its revenue from material processing companies; by 2013, that number was all the way up to 94%. Currently, it offers a full suite of lasers that OEMs can use, and all but one showed fantastic strength over the last quarter.

 

Growth in Q2

Percent of all Revenue

High-Power Lasers

22%

54%

Medium-Power Lasers

35%

11%

QCW Lasers

44%

4%

Pulsed Lasers

(19%)

17%

QCW represents quasi-continuous-wave lasers. These have short, high-power pulses to provide power while not heating up the laser surface too much. Percent of all revenue doesn't add to 100% because revenue for parts not included. Source: SEC filings.

Beating the competition
IPG is certainly not the only player in the fiber laser industry. Coherent (NASDAQ:COHR) and Rofin-Sinar (NASDAQ:RSTI) both offer fiber lasers as well. But those are just one of five different types of lasers that these companies offer, and neither is vertically integrated.

That provides some safety for investors -- as it's easier to control costs during downturns when a company isn't vertically integrated, and a greater variety of lasers provides more diversification.

But with fiber optic lasers, I believe the long-term trend is undeniable. There's a great risk/reward ratio from going all-in on this technology. Though there will certainly be stops and starts on the path toward adoption, it's difficult for me to see a future where fiber lasers aren't adopted by the vast majority of OEMs.

IPG's single focus on the industry gives me confidence that it will win the battle for business. It spends all of its research and development as well as capital expenditures solely on fiber lasers. And the company's vertical integration -- which admittedly is a drag during slow economic times -- allows it to offer products for far cheaper than the competition.

IPG's leadership believes much the same, as it announced it will be making major capital investments to expand the company's ability to meet demand from OEMs. The company's book-to-bill ratio currently sits above one, which means that currently, customers can't get enough of the company's lasers.

With shares currently trading for about 21 times earnings, and a huge opportunity in front of it, I think now's the time to buy shares of IPG. When Fool trading rules allow, I'll be adding shares to my Roth IRA.

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Brian Stoffel owns shares of IPG Photonics. The Motley Fool recommends IPG Photonics and Rofin-Sinar Technologies. The Motley Fool owns shares of IPG Photonics. 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.

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