1 Laser Stock Analysts Are Bullish On

It’s hard to carve out a moat in the business world, let alone one with a dominant market share too, but some companies, through long and tenured histories, have done just that. IPG Photonics (NASDAQ:IPG) is one such firm.

IPG Photonics holds a 33.29% share of the laser market, dwarfing its next largest competitor, Nlight, which holds a 5.44% share.

That dominance has resulted in a consistent billion dollars plus of sales since 2016 and it shows no signs of abating. So, what does it mean for IPG Photonics, is it a buy and what is the price target analysts have placed on it?

The Good, Bad & Ugly of IPG Photonics

IPG Photonics has a $4.3 billion market capitalization and has been growing sales at a fast pace since 2013. Back then, the top line came in at $648 million. Fast forward to fiscal year 2022 and revenues have grown to $1.4 billion, an impressive growth rate in the interim, no doubt.

Delving into the details a little further reveals some concerns, however, as sales have been relatively flat since 2017. Indeed back then sales were $1.40 billion. A year later they were $1.45 billion before falling 10% to $1.3 billion in 2019. The downward slide continued in 2020 with another 8.7% fall before a 21.7% uptick in 2021 to $1.46 billion.

In spite of the choppy top line, IPG Photonics has done a remarkably good job of consistently reporting operating income in the black. Over the past ten years, EBIT has ranged from $199.4 million to $551.1 million, and not a single year was reported in the red.

Those stable operating income figures haven’t been enough to persuade analysts to stay positive on the stock, though, and a total of four have revised earnings forecasts lower for the next period.

So, how do analysts rate IPG Photonics?

What Is The Target Price for IPG Photonics?

According to the seven analysts who cover IPG Photonics, the consensus target price is $121.57 per share. If the target price is reached, it would represent 35.3% upside opportunity for new investors.

After running a discounted cash flow forecast analysis, the fair value for the firm comes in slightly lower at $108 per share, corresponding to 17.5% upside potential.

It’s clear why analysts still have a lofty price target on IPGP even with revenues declining in recent quarters. Indeed, it’s worth noting that year-over-year revenue growth has slid backwards in each of the past five quarters. That was a U-turn on 7 quarters of YoY top line growth that preceded them.

Back to why analysts can be optimistic, however, we need only look to the balance sheet that has $528.3 million in cash reserves and no long-term debt whatsoever. That’s the kind of pristine balance sheet that should comfort conservative investors.

A further reason for shareholders to stay the course and hold the stock, in spite of the top line declines, is that the company has managed to stay profitable, reporting positive EPS in all but one quarter over the past twelve months.

Clearly, analysts are not alone in their assessment that IPG Photonics is undervalued. Management has been buying shares too. Or more specifically, the Board of Directors authorized a share repurchase scheme, spending $46 million on that plan in the last quarter alone.

Is IPG Photonics a Buy, Sell or Hold?

Year-to-date, IPG Photonics is down 4.2%, a significant underperformance relative to the S&P 500, which has risen by 14.17% so far.

The question for investors now is whether that comparably poor return has turned IPGP stock into a bargain or whether further declines are likely.

From a technical perspective, the share price has shown tremendous relative strength in the last week alone, rising higher by 5.0%. Often that kind of move, following a significant downtrend, represents a technical bullish break that is likely to continue in the near-to-medium term.

Certainly, a valuation analysis would confirm that the stock is now on sale and worth strong consideration. Depending on whether you consider a discounted cash flow analysis or a consensus price target from analysts, the upside ranges from 17% to 35%.

For conservative investors who respect Peter Lynch’s infamous advice to pay close attention to the balance sheet, there is much to like, particularly the cash rich, low debt ratio.

Less attractive are some of the financial ratios, such as the return on invested capital that sits at 5.3%, return on common equity of 3.4% and return on assets of 3.0%.

Still, the company does have a dominant market share position, commanding a holding that stands about six times larger than its nearest competitor. It’s held a similar share for over a decade, suggesting that competitors simply cannot dislodge the combination of the company’s technology advantage and distribution deals.

Overall that makes IPG Photonics an interesting play at this time both technically and fundamentally. Ultimately, on a valuation basis, IPGP is a Buy now.

Wrap-Up

IPG Photonics has a great deal going for it. In the laser market, it is the whale competing against minnow competitors. Better still, it shows no signs of losing its leading market share position in the short-to-medium term.

When examining the company through the lens of valuation and margin of safety, it appears to have significantly more upside opportunity than downside risk now.

So, too, technically does the stock appear attractive at this time, having fallen considerably relative to the market over the past year or so. 

It appears that the bad news of accelerating revenue declines have been largely priced in to IPGP share price and the potential for a resumption of a bullish trend is nearby.

For income-oriented investors, unfortunately no dividend is paid at this time. However, there appears to be sufficient supporting bullish factors to suggest the share price alone could generate handsome returns for investors willing to take the plunge.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.