Can IPG Photonics Bounce Back in 2016?

Image: IPG Photonics.

Cutting-edge technology has captured the manufacturing world, and laser-maker IPG Photonics (IPGP 0.32%) has been at the forefront of recent innovation. But the health of the global economy has come into question, and that has given investors some anxiety about whether customers will keep buying laser products despite the competitive advantages they provide. With shareholders in laser peer Rofin-Sinar Technologies (RSTI) having bid down its stock after its latest results last week, IPG Photonics investors are coming into the company's fourth-quarter financial report on Friday hoping for strong growth on the top and bottom lines. Let's take a closer look at what we're likely to see from IPG Photonics and how the entire industry could fare in 2016.

Stats on IPG Photonics

Source: Yahoo! Finance.

What's ahead for IPG Photonics earnings?
Investors in recent months haven't made major moves in their views on IPG Photonics earnings. They've boosted their fourth-quarter estimates and their full-year 2016 projections by a penny per share each. The stock has continued to struggle, falling another 7% since early November.

IPG Photonics' third-quarter financial report included some mixed results that investors didn't entirely know how to interpret. Revenue jumped 22%, but somewhat sluggish earnings growth of just 14% was more sluggish than investors had expected to see. Sales in the materials processing segment rose by 16%, and rising revenue from its telecom and advanced-applications arenas helped its Other segment triple its sales. But the company said that the fourth quarter was a seasonally weak time of year for the industry, and IPG Photonics' guidance for the quarter was well below the consensus forecasts among investors.

The stock initially dropped after the report, but details from the conference call following the release reassured investors and helped send the stock higher. CEO Dr. Valentin Gapontsev highlighted plans to expand IPG Photonics' geographical presence, saying that it would open an office in central China during the fourth quarter and expected new operations in Brazil, Mexico, and the Czech Republic in the near future. Moreover, Gapontsev said that even with tough economic conditions in emerging markets like China, he projected 10% to 15% revenue growth for IPG Photonics in 2016, somewhat reassuring investors who were worried about a much larger potential drop in sales.

One huge competitive advantage that IPG Photonics believes it has over Rofin-Sinar and other peers is its ability to offer its customers complete solutions to their needs. IPG Photonics' focus is on providing useful products that customers can use in the field. Whether it's providing welding pipe for the oil industry, developing welding and cutting systems for bridge and large-building construction, or metal welding and brazing applications for use in automobile manufacturing, IPG Photonics has strong faith that its products will keep standing out from the crowd.

Still, investors will want to see evidence that IPG Photonics is keeping its order flow up. Rofin-Sinar's book-to-bill ratio fell sharply during its most recent quarter, and its backlog fell by 10% just in the past quarter. Rofin-Sinar blamed the timing of a substantial order for a portion of its top-line shortfall, but it also cut its full-year 2016 guidance, citing expected cancellations from customers in China. If IPG Photonics sees the same behavior from its customers that Rofin-Sinar is experiencing, it could threaten both companies' growth prospects.

In the IPG Photonics earnings report, the key question will be whether the company can keep growing its earnings even as the business cycle looks like it might start to turn against it. If IPG Photonics can keep up its positive momentum and demonstrate the viability of its competitive advantages, then it could produce growth that puts Rofin-Sinar and other competitors to shame -- and gets IPG Photonics' share price back moving in the right direction.