There are earnings beats, and then there are earnings beats. What IPG Photonics
I expected good things from IPG's shares in 2011, owing to the company's dominant position in the rapidly growing fiber laser market and the overall steadily improving macroeconomic conditions. But wouldn't be telling the truth if I said that I expected the kind of blowout numbers for fourth-quarter 2010 that the company just preannounced; the midpoint of its new fourth-quarter earnings guidance range ($0.545 per share) is nearly 68% higher than the midpoint of its prior guidance range ($0.325 per share).
And it looks like I'm far from alone: Of the 11 analysts covering IPG, none officially expected the company to earn more than $0.36 per share in the fourth quarter going into Thursday. Hence the market's very enthusiastic response to the preannouncement.
Reasons to hang on
In the aftermath of such an enormous run-up, I can't blame any investor for thinking that this might be a good time to cash out of IPG's shares for the time being. But considering all of the positives working for the company, I think there are good reasons to stay in for now. Here are the biggest ones:
IPG isn't growing in a vacuum. Many of its peers have also delivered very solid earnings and/or guidance over the past month. Rival industrial laser manufacturer Coherent
saw its shares soar two weeks ago after delivering blowout earnings and superb guidance for 2011. Competitors Rofin-Safar Technologies (Nasdaq: COHR) and Newport Corp. (Nasdaq: RSTI) likewise had their estimates move higher following their fourth-quarter earnings releases. And a number of peers for IPG's emerging optical component business -- such as JDS Uniphase (Nasdaq: NEWP) , Oplink Communications (Nasdaq: JDSU) , and OPNET Technologies (Nasdaq: OPLK) -- also streaked higher after delivering standout results. IPG clearly isn't growing just on account of its own competitive strengths; it's also part of a rising tide that's lifting almost every boat. (Nasdaq: OPNT)
- Macroeconomic conditions are encouraging. Heavy equipment giant Caterpillar, long considered a bellwether for global capital spending, delivered crowd-pleasing earnings and guidance last month. Meanwhile, OPEC raised its outlook for 2011 global oil demand, in large part due to stronger-than-expected industrial activity; the U.S., China, and Japan all recently posted very strong industrial output figures. The economic backdrop for capital investments that drive the industrial laser market looks very healthy.
- IPG's operating leverage is huge. The 68% increase in the midpoint of IPG's earnings guidance range was accomplished on the back of a relatively modest 20% increase in its revenue guidance from the midpoint of its prior range. This speaks to the huge degree of operating leverage in the company's business model, with earnings growth bound to outpace revenue growth as capital spending and other fixed costs become a smaller percentage of its sales.
- Earnings estimates will be moving higher. Way higher. Prior to Thursday's preannouncement, IPG's consensus earnings estimate for fiscal 2011 was $1.31 per share. While it's tough to make a precise guess, it wouldn't surprise me if this figure now rises to something north of $1.80 per share, and that a consensus estimate in the area of $2.30 per share emerges for 2012. And to put it mildly, analyst forecasts for IPG have often proven conservative in recent quarters.
Take into account those upcoming estimate increases, and the business fundamentals driving them, and IPG's run-up becomes much easier to stomach. The company's shares are off to a good start in 2011, but this doesn't mean that it can't deliver more positive surprises to Wall Street over the course of the year.
Fool contributor Eric Jhonsa has no position in any of the companies mentioned. IPG Photonics is a Motley Fool Rule Breakers selection. Rofin-Sinar Technologies is a Motley Fool Hidden Gems selection. The Fool owns shares of IPG Photonics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.