II Steps IV-ward, I Step Back

If you're a Motley Fool Hidden Gems member, and you're feeling a little topsy-turvy in your tummy this fine Thursday, then fear not. It's not something you ate. It's the shares of laser parts maker II-VI (Nasdaq: IIVI) in your portfolio giving you a dose of seasickness.

Seriously, folks, the herky-jerky movements in II-VI's price this week would rust a hole through the thickest of cast-iron stomachs. Down 11% Tuesday, when the news broke. Back up 10% yesterday for no apparent reason. And down again 6% today. (By the way, thanks for the downgrade, Needham. Your CAPS rating is ugly, so you don't have much credibility.)

Nautical metaphors and ad hominems aside ...
How did II-VI do? By all objective measures, quite well:

• Sales leapt 25% in comparison to last year's Q3, which was better than expected.
• Gross margins dropped 260 basis points to 43.7%, yet ...
• Operating margins added 70 basis points nonetheless, to reach 19.2%, expanding II-VI's lead over rivals such as Rohm & Haas (NYSE: ROH), Northrop Grumman (NYSE: NOC), and Coherent (Nasdaq: COHR). (The Dow Corning joint venture between -- surprise -- Dow (NYSE: DOW) and Corning (NYSE: GLW), however, does post better margins than II-VI.)
• Profits jumped 33% to $0.44 per share.
• Management didn't mention its free cash flow figures for the quarter, but did let slip that capital expenditures declined by about $1.4 million, which suggests improvement.

Looking forward, it seems a Fool can expect further good news, based on management's mentioning that new order bookings grew 44% in Q3. Because that number is faster than sales growth, you can expect it will lead to accelerating sales down the road.

But didn't Reuters say ...?
I know, I know. According to Reuters, the reason the stock took an initial tumble was because sales are going to be less than expected. II-VI predicts it will earn about $0.42 a share this current Q4 on revenue of roughly $86.5 million. Analysts had hoped to hear that II-VI would sell about $1 million more stuff, and earn a penny more profit. And yes, II-VI predicts only 11% sales growth next year, and a 12% increase in earnings (excluding one-time items), which would fall significantly short of the 20% long-term growth targets that Wall Street has its heart set on.

But the way I see it, II-VI is showing remarkable facility in drawing in new orders faster than it needs to fill existing orders. Unless something happens to derail that trend next year, I suspect we could see a bump in estimates in the months ahead -- and a reversal in analyst unease as well. Just don't expect it to be smooth sailing. The seas of investor sentiment could remain rough for a while.