Expectations were subdued going into the fourth-quarter fiscal report for IPG Photonics (IPGP 0.24%). Last quarter, investors were rattled when the industrial laser maker reported that "global macroeconomic and geopolitical headwinds have persisted into the fourth quarter, affecting our business along with others in the sector," according to CEO Valentin Gapontsev. Those conditions included weakness in China and Europe, two of IPG's biggest markets, causing year-over-year declines in revenue and earnings.
Despite ongoing challenges, IPG was able to produce results that beat expectations and reported a decrease in the headwinds that have plagued the company, giving investors hope that the worst might be over. This caused the stock to soar more than 7% in the wake of its earnings report. Here are three reasons for the boost in the share price.
1. Better-than-expected financial metrics
IPG delivered results that beat guidance on the top and bottom lines. Revenue of $330.1 million declined 9% year over year, but exceeded the high end of the company's guidance, which topped out at $330 million. It also easily surpassed analysts' consensus estimates, which called for $314.76 million. Profitability met expectations, with earnings per share of $1.40, which was at the midpoint of IPG's guidance and in line with the $1.41 expected by analysts.
While weakness in China and Europe persisted, "European sales increased 8% on a sequential basis, suggesting that we may have reached a bottom in the current downturn in this business," CFO Tim Mammen said on the conference call.
2. New products are gaining steam
In early November, IPG announced that it would acquire privately held Genesis Systems Group, a company that specializes in integrating robotic welding and automation solutions. This is the latest in a series of moves by the company to diversify into other areas outside cutting lasers, its core business. In recent years, IPG has added pulsed lasers, communications products, and advanced applications to its growing stable of products.
That move is beginning to bear fruit, as IPG reported on the conference call that these new growth areas increased 36% year over year in 2018, accounting for 15% of total revenue last year and 20% in the fourth quarter.
3. Cautious optimism
There were several comments by IPG's executives on the conference call that gave investors hope. "There has been a modest pickup in order activity since late December," Mammen said, "and we are more encouraged by the overall demand environment than we were three months ago."
Washington and Beijing haven't yet declared an end to trade hostilities, but there is rising hope. "Our [original equipment manufacturer] customers in China suggest cautious optimism regarding a midyear pickup in demand driven by government stimulus and continued infrastructure investment," Gapontsev said. He added that the company didn't have "clear visibility" into its customers' plans for 2019, and would hold off on full-year guidance until things came into focus.
With China as its largest market -- currently accounting for more than a third of the company's sales -- IPG could see a significant boost to its business once the trade war is over and as the Chinese government works to improve the country's slowing economy.
What the future might hold
IPG signaled its cautious hope in the forecast it issued for the first quarter. Management is guiding for revenue in a range of $290 million to $320 million, a decline of between 11% and 19% year over year. The company is also expecting diluted EPS in a range of $1 to $1.20, down between 38% and 48%.
To put this into the perspective of Wall Street's sentiment toward the company (without falling victim to its short-term thinking), analysts' consensus estimates were for revenue of $328.21 million, a decline of 8.8%, and EPS of $1.43, down about 26%, both year over year.
While a 9% decline in revenue might not seem worthy of such a celebration, investors were thankful that things weren't worse. And hope is growing for a resolution to the trade war, sparking optimism.