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Why Shares of II-VI Fell More Than 20% in May

By John Bromels - Jun 9, 2019 at 4:34PM

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The company outperformed but didn't live up to lofty expectations.

What happened

Shares of laser specialist II-VI (IIVI 0.70%) fell 21.1% in May, according to data from S&P Global Market Intelligence. The drop completely erased the company's gains for the year. While the slide was pretty steep near the beginning of the month, it eased later in the month, and by June, the company's share price was showing signs of stability. 

So what

II-VI (pronounced "two-six") delivered a good-but-not-great quarterly earnings report on May 1. The company's fiscal year runs July June, so this was the report for Q3 of fiscal 2019. 

A green laser beam shines through an array of electronic circuits

Top laser manufacturer II-VI provides components to many cutting-edge industries. Image source: Getty Images.

Revenue was up 16% over the prior year to $342.4 million, which exceeded analysts' expectations. Adjusted net earnings were up even more: 32% higher than the year-ago quarter at $40.6 million, or $0.62/share. Despite the big jump, analysts had been expecting a slightly higher $0.65 per share. That disappointment probably contributed to the May sell-off.

Of more concern to investors may have been the company's guidance, which was -- again -- good but not great. For fiscal 2019's Q4, the company forecast revenue of between $343 million and $353 million, well above the $321.1 million of the prior-year quarter. However, earnings per diluted share, unadjusted, were only anticipated to be in the $0.33 to $0.39 range, down from $0.42 in the prior-year quarter. Adjusted earnings, however, of $0.63 to $0.71 a share are expected to handily outperform the prior year's $0.52, but analysts were still expecting more.

Compounding some of these concerns over the earnings report, there was some speculation that new restrictions against trading with Chinese telecom Huawei could hurt II-VI. The Commerce Department added Huawei to the list of restricted entities on May 16. However, on May 21, II-VI released a statement that the restriction would have "minimal effects" on II-VI's sales and prospects, and the company reaffirmed its Q4 guidance. The company also doesn't expect current U.S.-China trade tensions to affect China's approval of II-VI's proposed major acquisition of rival Finisar. 

Now what

Lasers are a critical component in several cutting-edge markets, including fiber-optics and optical communications, industrial materials cutting and processing, life sciences, automobiles, and consumer electronics. That means that II-VI is usually pretty insulated from slowdowns in any of its end markets. For example, in its most recent quarter, the company's photonics and performance products units outperformed well enough to offset weakness in its industrial segment. 

However, fears of a broader economic slowdown coupled with less-than-stellar guidance have investors worried. While II-VI still looks like a long-term buy, investors should probably expect a rocky road ahead as these various events play out.

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