Will IPG Photonics Earnings Finally Cool Off?

Image: IPG Photonics.

Lasers have revolutionized the world, and as a maker of high-end cutting-edge laser products, IPG Photonics (IPGP +12.22%) has reaped the rewards of being at the forefront of the industry. For years, IPG Photonics has used its advanced experience in laser development to build up its business in several key sectors of the economy.

Yet with IPG Photonics set to release its second-quarter earnings on Tuesday, shareholders have recently suffered a rare downdraft in the company's stock price, and some worry that a potential future slowdown in earnings growth could cause the laser maker to lose momentum going forward. Let's take a closer look at what's been happening with IPG Photonics, and what investors should expect from its results.

Stats on IPG Photonics

Source: Yahoo! Finance.

Hopes rise for IPG Photonics earnings
By all accounts, most investors seem to have built up more confidence about IPG Photonics earnings' prospects in recent months, having raised their second-quarter projections by $0.04 per share, and making a more significant 3% increase in their full-year earnings expectations for 2015. Yet the stock has slumped considerably, falling more than 15% since late April.

IPG Photonics' first-quarter financial report gave few signs of any impending sluggishness in the laser-maker's business. Sales climbed by 17%, which was a bit less than most investors had expected to see, but demand for its high-powered fiber lasers helped push net income up by 42% from the year-ago quarter. The materials-processing and welding areas performed especially well for IPG Photonics, and worldwide, the company saw strength in China and Europe despite their respective macroeconomic challenges.

Yet late last month, IPG Photonics saw its stock price start to drop substantially. No direct news from the company seemed to explain the drop, leaving investors to speculate about the potential causes.

The decline corresponded fairly closely with the plunge in the Chinese stock market, and with IPG Photonics doing a significant amount of business in China, weakness there could hurt the laser-maker's prospects going forward. Others pointed to reports of an apparent decision from one of IPG Photonics' major Chinese customers to raise capital in order to build up some fiber-laser production capacity internally as a potential cause for the decline.

Still, IPG Photonics sees plenty of opportunities to cash in on the success of various industries in the economy. In aerospace, the laser-maker's products allow manufacturers to cut into thick pieces of lightweight materials like aluminum and titanium, helping them take advantage of the fuel-efficiency benefits that these durable metals offer. Also, there are 3-D printing applications for lasers, as they can either help in the additive manufacturing process, or use the different process of burning away shaped parts from an initial block of material.

A cyclical downturn might actually be good for IPG Photonics by allowing it to execute its long-term strategy. The company has built up a solid cash position, and it has said that, rather than paying a dividend or doing stock repurchases, IPG Photonics would prefer to use capital to invest in its business through strategic acquisitions that build up expertise in key areas. A downturn would make those potential purchases less expensive, stretching IPG Photonics' cash further, and giving it an even stronger competitive advantage against its rivals.

In the IPG Photonics earnings report, watch for comments about the company's prospects in China, especially with respect to its current key customers. The laser maker would survive the defection of some of its current clients, but its long-term strategy of building up economies of scale, and using its vertical integration to maximum effect, depends on being able to lure new customers into the fold rather than losing existing ones.

If rumors turn out to have been exaggerated, then IPG Photonics might recover much of its lost ground in the near future.