Foolish Forecast: Locking In on IPG Photonics

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Sales growth of 32%. Earnings growth of 80%. I had a lot of nice things to say about fiber laser-maker IPG Photonics (Nasdaq: IPGP) last quarter, but one thing I couldn't say anything good about was the firm's free cash flow -- because it didn't have any. In fact, after pointing out the firm's twin spikes in inventories and uncollected accounts receivable, I concluded last quarter's earnings report by wistfully musing: "Next quarter, this company might want to consider doing a little less laser-building and a little more bill-collecting."

Well, on Thursday, we'll get to see whether IPG did just that, when this Motley Fool Rule Breakers selection reports its fiscal fourth-quarter 2007 numbers.

What analysts say:

• Buy, sell, or waffle? Nine analysts unanimously agree that IPG is a buy.
• Revenue. On average, they expect to see 26% quarterly sales growth to $53.2 million.
• Earnings. Profits, however, are predicted to rise only 12% to $0.19 per share.

What management says:
Hailing his firm's "record financial results," CEO Dr. Valentin Gapontsev credited "sales of our lasers for materials processing applications" for driving growth in Q3. Looking down the road, he predicted further success in selling lasers for use in "test and measurement, instrumentation, sensing, scientific R&D and defense," and noted a rebound in sales to the telecommunications industry, mentioning Russia as one bright light.

Gapontsev was not specific about who's buying lasers in Russia. My guess? It won't be either Mobile TeleSystems or VimpelCom, since those two specialize in cell phones. More likely, we're talking fixed-line operators like Rostelecom (NYSE: ROS) or North West Telecom. Both are subsidiaries of OAO Svyazinvest, and we already know that North West is an IPG customer.

What management does:
Believe it or not, and as specialized a niche as it sounds, laser manufacturing is a pretty crowded field. IPG competes with firms ranging from the relatively small -- such as Coherent (Nasdaq: COHR) and Rofin-Sinar (Nasdaq: RSTI) -- to the absolutely gigantic, like Nortel (NYSE: NT) and Cisco (Nasdaq: CSCO). So I suspect it says something about the quality of IPG's products and business that this company is able to maintain, and even expand, margins like those you see below.

Margins	6/06	9/06	12/06	3/07	6/07	9/07
Gross	38.9%	41.8%	44.2%	46.1%	47.0%	46.4%
Operating	20.8%	23.9%	25.1%	26.0%	25.7%	25.4%
Net	11.0%	12.2%	20.4%	21.5%	21.0%	21.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
In October 2007, as part of our third annual review of all recommendations made to date, the team at Motley Fool Rule Breakers described IPG's performance thusly: "Everything is going to plan ... Its fiber lasers are being rapidly adopted in materials processing and the life sciences, and military contracts offer another opportunity. IPG continues to have the highest growth, the lowest PEG, and the best margins of its peers. It's making rapid headway with a potentially disruptive technology.

Since then, our advisors have had the chance to discuss IPG's business with both the CFO and the vice president of industrial markets. So is everything still going according to plan? Take a free trial of the service, read the interview, and find out.