Laser maker and Motley Fool Hidden Gems recommendation II-VI (NASDAQ:IIVI) reports its first quarterly results of fiscal 2008 tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts follow II-VI (pronounced two-six), unanimously voting the stock a buy.
  • Revenue. On average, they're looking for 21% sales growth to $73.6 million.
  • Earnings. Profits are predicted to rise even faster, up 28% to $0.32 per share.

What management says:
Earlier this month, II-VI announced the purchase of Germany's HIGHYAG Lasertechnologie GmbH, a maker of "tools for laser materials processing" and "beam delivery systems." While II-VI kept mum on the financial specifics of the deal, it doesn't look to be huge in monetary terms; HIGHYAG booked only $6.2 million in revenue last year. The real value of the deal to II-VI seems to be that it will "expand its product offerings of laser optics and components." The purchase is expected to close within the next six months, and II-VI promised to update its guidance based on HIGHYAG's contributions when it closes.

And the best news? That would be the fact that in buying 74.9% of HIGHYAG, II-VI is leaving the remaining 25.1% (presumably a "blocking stake," although I admit to an ignorance of German securities law) in the hands of HIGHYAG's CEO. I expect this will ensure that II-VI doesn't lose the man who made HIGHYAG into the kind of company II-VI would want to own in the first place.

What management does:
Gross margins at II-VI have settled in the 41% range, while operating margins continue to march upward. Judging from last year's financials, it looks like most of II-VI's operating margin improvement came from lower raw material costs relative to pricing power. Sales were up 13% year over year in fiscal 2007, while cost of goods sold rose only 10%.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I love what I'm seeing with II-VI's margins, generally, but one thing does worry me. For the first time in four years, research and development spending declined last year. As I've mentioned in past columns -- for example, on EMC (NYSE:EMC) and Ciena (NASDAQ:CIEN), and in an interview with Corning's (NYSE:GLW) CEO -- it worries me whenever a high-tech firm seems to be skimping on R&D. These firms need to invest heavily in research and development to stay ahead of the competition. (At II-VI, competitors include formidable names such as Goodrich (NYSE:GR), Raytheon (NYSE:RTN), and Northrop Grumman (NYSE:NOC).)

Now, I admit that this may be a bit nitpicky, and that in II-VI's case, buying a company with complementary products such as those HIGHYAG offers may act as a proxy for in-house research and development work. If that's the case, then the R&D issue may turn out to be a red herring. Still, over future quarters, this is one line item of the income statement that we'll want to read closely.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.