Laser maker and Motley Fool Hidden Gems recommendation II-VI
What analysts say:
- Buy, sell, or waffle? Half a dozen analysts follow II-VI (pronounced two-six), unanimously voting the stock a buy.
- Revenue. On average, they're looking for 21% sales growth to $73.6 million.
- Earnings. Profits are predicted to rise even faster, up 28% to $0.32 per share.
What management says:
Earlier this month, II-VI announced the purchase of Germany's HIGHYAG Lasertechnologie GmbH, a maker of "tools for laser materials processing" and "beam delivery systems." While II-VI kept mum on the financial specifics of the deal, it doesn't look to be huge in monetary terms; HIGHYAG booked only $6.2 million in revenue last year. The real value of the deal to II-VI seems to be that it will "expand its product offerings of laser optics and components." The purchase is expected to close within the next six months, and II-VI promised to update its guidance based on HIGHYAG's contributions when it closes.
And the best news? That would be the fact that in buying 74.9% of HIGHYAG, II-VI is leaving the remaining 25.1% (presumably a "blocking stake," although I admit to an ignorance of German securities law) in the hands of HIGHYAG's CEO. I expect this will ensure that II-VI doesn't lose the man who made HIGHYAG into the kind of company II-VI would want to own in the first place.
What management does:
Gross margins at II-VI have settled in the 41% range, while operating margins continue to march upward. Judging from last year's financials, it looks like most of II-VI's operating margin improvement came from lower raw material costs relative to pricing power. Sales were up 13% year over year in fiscal 2007, while cost of goods sold rose only 10%.
3/06 |
6/06 |
9/06 |
12/06 |
3/07 |
6/07 |
|
---|---|---|---|---|---|---|
Gross |
40.5% |
40.2% |
40.3% |
41.6% |
41.8% |
41.7% |
Op. |
16.4% |
16.6% |
16.7% |
18.1% |
17.8% |
18.4% |
Net |
11.5% |
4.6% |
4.8% |
6.2% |
7.1% |
14.4% |
One Fool says:
I love what I'm seeing with II-VI's margins, generally, but one thing does worry me. For the first time in four years, research and development spending declined last year. As I've mentioned in past columns -- for example, on EMC
Now, I admit that this may be a bit nitpicky, and that in II-VI's case, buying a company with complementary products such as those HIGHYAG offers may act as a proxy for in-house research and development work. If that's the case, then the R&D issue may turn out to be a red herring. Still, over future quarters, this is one line item of the income statement that we'll want to read closely.