I'll make you a deal. You don't say you weren't warned, and I won't say "I told you so."

Because when Motley Fool Hidden Gems alumnus II-VI (NASDAQ:IIVI) reported earnings last quarter, I did warn that:

... it looks like the good times may soon stop rolling for II-VI.  ... new orders ... declined 8% year over year [which] suggests a marked slowdown in sales growth lies ahead of us. As indeed does the latest guidance. II-VI expects to make about $84 million in sales this current quarter, and earn $0.40 thereon.

That said, I did not "tell you so," because even I did not suspect the speed with which things would fall apart in the laser components market. II-VI couldn't even wait until Q2 earnings rolled around in January to update us on this. Instead, to stay ahead of the curve, management felt compelled to rush out an earnings warning last week. Some selected figures from the warning:

  • Sales are now expected to range between $71 million and $76 million (12% worse than previously predicted).
  • Profits should come in between $0.27 and $0.33 per share -- a 25% disappointment.

The stock proceeded to crater (surprise). But the damage wasn't as bad as it might have been. II-VI fell "only" 20%, and it even regained some of those losses as the week progressed. The question facing us today, though, is: Did it fall enough to buy back in?

Buy the numbers
For the answer, let's look past the Q2 disappointment to what II-VI foresees for the rest of this year. In fiscal 2009, II-VI thinks it can book about $300 million in sales and earn approximately $1.38 in profits thereon. And I have to say -- that's not half bad. It works out to about a 13.8% net profit margin, which is better than the trailing-12-month profit margin for rivals Rofin-Sinar (NASDAQ:RSTI), Northrop Grumman (NYSE:NOC), Coherent (NASDAQ:COHR), or Rohm & Haas (NYSE:ROH). (Better, too, than R&H's new owner, Dow Chemical (NYSE:DOW) earns.)

Granted, it's not as strong a profit margin as rival IPG Photonics (NASDAQ:IPGP) has recently earned -- but then, we haven't yet seen whether IPG’s planning an earnings warning of its own. At least with II-VI, we're dealing with the devil we know.

Buy the devil?
Moreover, from where I sit, II-VI now looks attractively priced. Assuming the bad news has been baked into the stock price, and there are no more shoes waiting to drop, we're now looking at a stock with a forward P/E of around 12 that's expected to grow about 13% annually over the next five years. That seems pretty fair to me. If the free-cash-flow picture looks as good as II-VI's new forecast suggests, I'd be a buyer here.

IV more IV-I-I on II-VI, read:

And to learn why our team "sold" the stock out of the Hidden Gems portfolio -- before last week's bad news struck -- click here to claim a free trial.

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.