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Will the Trade War Continue to Drag on IPG Photonics' Earnings?

By Danny Vena - Oct 23, 2019 at 8:32AM

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The industrial laser maker has been a victim of economic weakness in its largest markets.

Investors in IPG Photonics (IPGP 2.08%) are becoming accustomed to disappointment. The technology company has suffered from the ongoing trade war with China and the economic weakness in some of its core markets, which have conspired to drag on its results. After reaching all-time highs in early 2018, the stock has lost nearly half its value.

Overtures between the Trump administration and China in recent weeks have given investors hope that tensions may be thawing between the countries -- which could provide much-needed relief for IPG Photonics. The company is scheduled to report the financial results of its third quarter after the market close on Tuesday, Oct. 29. Let's recap its second-quarter results and the accompanying commentary to see if there are signs that the worst is over or if there are more challenges yet to come.

A laser mounted on a robotic arm cutting metal.

Image source: Getty Images.

It's always darkest before the dawn?

For the second quarter, IPG Photonics reported revenue of $364 million, a 12% decline from the prior-year quarter. It also marked the fourth consecutive quarter of year-over-year revenue declines, though the results came in near the high end of management's guidance range of between $340 million and $370 million. This was the result of revenue that fell 19% in China and 22% in Europe, though sales in North America increased by 34%.

The pain was felt all the way down the income statement. The company delivered earnings per share of $1.34, a 39% year-over-year decline, but near the midpoint of management's range for earnings per share of between $1.25 and $1.55.

No relief from the trade war

Investors were likely looking for any sign that the situation might improve, but that just wasn't the case. "The macroeconomic and geopolitical environment remains challenging," CEO Dr. Valentin Gapontsev said. He went on to point out that things had gotten worse instead of better. "Data points relating to the health of manufacturing economies in our largest regions have weakened over the last three months."

In addressing the trade war directly, Gapontsev said, "Escalation of the U.S.-China trade conflict and further macro softness have reversed the market recovery that we had expected to strengthen in the second half of 2019. ... As a result, we do not have the necessary conviction to provide an outlook beyond the current quarter."

Challenges remain

Management didn't pull any punches regarding the upcoming third quarter. IPG expects revenue in a range of $325 million to $355 million, which would represent a year-over-year decline of between 9% and 1%. Profit is also expected to be squeezed. The company is forecasting earnings per share in a range of $1.35 and $1.05, or a 27% to 43% decline from the prior-year quarter.

It isn't all bad news, though investors would be forgiven for thinking so. IPG management sees the current difficulties as an opportunity to position the company for a brighter future by "substantially reducing component and manufacturing costs while enhancing existing products and introducing new solutions that improve productivity and increase flexibility for our customers."

If these efforts are successful, IPG Photonics will be in a much better position when the current situation is eventually resolved.

Danny Vena owns shares of IPG Photonics. The Motley Fool owns shares of and recommends IPG Photonics. The Motley Fool has a disclosure policy.

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