Please ensure Javascript is enabled for purposes of website accessibility

Cost-Cutting Helps Boost IPG Photonics' Profits

By Daniel Vena - May 8, 2020 at 8:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors are celebrating because the results from the industrial laser maker were far better than expected.

In the face of the new normal, the worst-case scenario is frequently what investors have come to expect. Then, when things turn out to be not nearly as dire as anticipated, investors breathe a sigh of relief. That's exactly what happened with IPG Photonics (IPGP 2.08%).

Going into the company's first-quarter earnings report, the stock was down roughly 18% year to date. The industrial-laser maker's business in China had taken a hit due to the COVID-19 pandemic, and while business has begun to improve, it coincided with declining business in other regions.

Still, revenue came in at the high end of management's guidance and profits were far better, and the news was good enough to send IPG Photonics stock up roughly 21% in the wake of the earnings release.

Laser on robotic arm cutting metal.

Image source: Getty Images.

Making the best of tough times

IPG reported revenue of $249.2 million, down 21% year over year, just missing the high end of management's guidance range of between $220 million and $250 million. It also easily surpassed analysts' consensus estimates of $237.74 million. 

Profits also came in far better than expected, as IPG delivered diluted earnings per share of $0.68, smashing management's guidance in a range of $0.00 to $0.30, while also demolishing analysts' consensus estimates of $0.19. 

The biggest contributor to the bottom-line beat was the company's success at reining in operating expenses, with sales and marketing costs down 3% year over year, research and development expenses down 2%, and general and administrative costs essentially flat. IPG also got an unexpected boost from foreign currency exchange rate tailwinds, which benefited the results to the tune of nearly $20 million. All in all, operating expenses declined 28% to $58 million, though operating income of $44.8 million still fell 34%.

"We delivered first-quarter revenue at the high end of our guidance range on a rebound in China-based demand during March and strength in new products," said CEO Dr. Valentin Gapontsev.

Limited (but positive) visibility

IPG management noted that its book-to-bill ratio was "meaningfully greater than 1.0," which, under normal circumstances, would be a bullish signal. The metric is a useful indicator of future demand within the industry. When the ratio falls below 1.0, it's indicative of weaker demand, while 1.0 or higher is a gauge of strong demand.

The company noted that this would normally have "translated into stronger guidance," but the uncertainty resulting from the ongoing pandemic made IPG err on the side of caution.

For the upcoming second quarter, IPG Photonics is forecasting revenue in a range of $260 million to $290 million, which would represent a decline of between 28% and 20% year over year. The company is also guiding for diluted EPS in a range of $0.40 to $0.70, which would spell a decline of between 70% and 48% compared to the prior-year quarter.

A laser focus on the future

IPG Photonics' management continues to look to the future, with plenty of remaining opportunities, according to Gapontsev:

Despite the uncertain near-term demand environment, we continue to target significant longer-term growth opportunities in laser welding, electric vehicle battery processing, and our portfolio of new products.

Economic disruptions can wreak havoc on cyclical stocks like IPG Photonics. However, once the pandemic has passed, management has positioned the company to be stronger, leaner, and more profitable going forward.

 

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

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

IPG Photonics Corporation Stock Quote
IPG Photonics Corporation
IPGP
$105.18 (2.08%) $2.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.