IPG Photonics Looks to Recapture Its Momentum

Laser cuts. Image: IPG Photonics.

The laser industry has been at the forefront of the manufacturing revolution around the world, as companies look for ways to use lasers to boost productivity and become more effective at building things that require high levels of precision. Despite its modest size, IPG Photonics (IPGP 0.22%) has become a leader in the laser space, easily outpacing the growth rates that industry peers such as Rofin-Sinar Technologies (RSTI) have managed to post, and the growth that the company has seen in recent years reflects the widespread adoption of laser products from a whole host of customers.

Still, as IPG Photonics prepares to issue its third-quarter financial report on Tuesday, the stock has fallen back, perhaps in response to concerns about macroeconomic headwinds holding back growth in key areas of the world. Let's look more closely at how IPG Photonics has fared lately, and what investors should watch for when it releases its latest results.

Stats on IPG Photonics

Source: Yahoo! Finance.

Can IPG Photonics keep firing on target?
Investors remain cautiously optimistic about the prospects for IPG Photonics earnings. In recent months, the company has boosted its earnings estimates by more than $0.05 per share, and increased its full-year 2015 and 2016 projections by 2% to 3%. The stock, though, hasn't performed well, falling 8% since mid-July.

The quarter actually got off to a good start. IPG Photonics' second-quarter financial report helped to send the stock skyward. Sales jumped a faster-than-expected 22%, accelerating from previous quarters, and proving that IPG's best growth prospects aren't necessarily behind it.

The laser maker also managed to overcome foreign-exchange headwinds, lifting net income by 27% from the year-ago quarter and easily topping the expectations among those following the stock. In particular, the high-power fiber laser segment had above-average growth for the company, and IPG Photonics also surprised some investors by reporting strong results in Asia, a region that has disappointed companies in other related industries recently.

Yet even its past levels of success haven't held back IPG Photonics from seeking more. CEO Valentin Gapontsev told investors in July that the company is looking to expand its international presence across the globe in order to meet rising customer demand. In particular, IPG Photonics plans to establish new sales centers in Europe and South America, with other locations also in consideration for similar expansions. That will leave the laser maker even more exposed to the fluctuations in the currency markets and their consequent impact on revenue and earnings; but IPG Photonics nevertheless believes that it's important to give current and prospective customers the service they want when and where they want it.

One key to IPG Photonics' ongoing competitive advantage against rivals like Rofin-Sinar is ensuring that it can keep its costs down as much as possible. To a large extent, many customers have figured out that, even though they might be able to develop similar laser products in-house, they wouldn't be able to do so as cheaply or efficiently as IPG Photonics can, and so it makes sense to look outside their organizations rather than trying to bring laser manufacturing into a vertically integrated model. Even though one of IPG's larger customers in China announced that it would seek to develop fiber lasers on its own, IPG remains unconcerned, knowing that the customer will take years to get the process done, and then might well find out that it's uneconomical compared to taking advantage of IPG's expertise.

In the IPG Photonics earnings report, look for any change in the company's stance on how macroeconomic factors affect its business. In the past, Gapontsev and his management team have assured investors that IPG Photonics hasn't seen any slowdown in order flow, and Gapontsev, in particular, believes that Chinese manufacturers will still want lasers in order to improve their quality control and build up a positive reputation. In all likelihood, it would take a much larger economic disruption than we've seen to date in order to have a marked impact on IPG Photonics' business going forward.