Investors in industrial laser maker Coherent Inc. (NASDAQ:COHR) had a grand time in 2016. Over the course of 12 short months, their stock grew 120% in value. And now, here at the apex of 2016, the good news just keeps getting better.
This morning, just days before the ball drops on 2016, analysts at Benchmark have doubled down on their buy rating on Coherent stock, and added $35 to their price target -- which now stands at $160. The new target, which is 28% above where Benchmark previously pegged Coherent's value, promises to return about 16% profits in a year to investors who buy the stock today -- and add another 16% onto the winnings of those who've already profited from Coherent this year.
Here are three things you need to know about Coherent's new rating.
1. A happy (old) year for Coherent
Coherent wrapped up its own fiscal 2016 back in early November, reporting end-of-year results that featured only 7% sales growth -- but a 17% leap in profits per diluted share ($3.58). Management captioned 2016 "a record setting year," and predicted that "record backlog and a strong order pipeline have us very well positioned for fiscal 2017."
Although Coherent didn't give specific guidance on what to expect in 2017, analysts quoted on S&P Global Market Intelligence are expecting profits to soar 82% to $6.51 per share on 73% revenue growth. While these are significantly better numbers than what Coherent saw in 2016, there's reason for the optimism, because a few days after earnings were released, Coherent announced the closing of its acquisition of rival Rofin-Sinar Technologies -- absorbing that company's $490 million annual revenue stream, and its more than $1 a share in annual profits, into its own.
2. The future for Coherent
Clearly, Coherent's laser business is booming, and the acquisition of Rofin-Sinar will only add momentum. Adding to the good news, Benchmark notes that Coherent is seeing new opportunities in the use of its industrial lasers to help create organic light-emitting diode (OLED) displays for televisions and mobile devices -- and smartphones in particular.
Both Samsung and Apple are known to be rushing such products to market. Farther down the line, Coherent believes that OLED TVs will begin to become big business for it in about three to five years. Thus, the growth story that Benchmark says is available to investors today is one that could continue for some years from now.
3. Where's the value?
According to Benchmark, Coherent stock that currently costs about $138 a share should be worth $160 by the end of 2017. The growing use of OLED displays in smartphones will drive some of this growth. But as Benchmark explains in a write-up on TheFly.com today, between smartphones now, and TVs three to five years from now, Coherent will also benefit from demand for its lasers to create OLED displays for tablet computers and PCs in between.
This medium-term growth driver, says the analyst, is what makes Coherent stock more valuable than it previously thought. But with the stock having already doubled in 2016, what are the prospects for Coherent stock to get even more expensive in 2017, really?
The most important thing: Valuing Coherent
Well, let's see here. Coherent's recent absorption of Rofin-Sinar -- but not having yet released financial results showing how the two firms are working together -- makes valuing the stock a little tricky. But let's assume that the consensus estimates on the merged company are correct, and that the new-and-improved Coherent will in fact earn $6.51 per share next year.
At today's price of $138 a share, Coherent stock is selling for roughly 21 times forward earnings. The same analysts who offer the earnings estimate also believe that Coherent will be able to maintain about a 16% annual growth rate over the next five years. Thus, valued on forward earnings, Coherent stock is selling for a PEG ratio of about 1.3.
That's not as expensive a valuation as we would see if valuing Coherent on its $3.58 in trailing earnings, but it's still pretty pricey -- and Coherent pays no dividend to sweeten the deal. Additionally, while it's not certain right now how much cash Rofin-Sinar brings to the table, Coherent proper was at last report generating free cash flow of only $56 million annually, or about 64% of reported income. So valued on trailing free cash flow, the stock would appear to be even more expensive than when valued on earnings.
Long story short, while I can't argue with the stock's success in 2016, at today's share price -- again, more than twice what it cost at the beginning of 2016 -- I simply don't see much room for growth in 2017. Even if Benchmark is right about everything else affecting Coherent's business, I disagree with its recommendation to buy the stock.
Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2018 $90 calls on AAPL and short January 2018 $95 calls on AAPL. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.