The increased usage of laser technology within the consumer, industrial, and medical industries has boded well for IPG Photonics Corporation (NASDAQ:IPGP). IPG is known for manufacturing the groundbreaking fiber-based laser.
Lasers have progressed substantially since they were first operated by Theodore H. Maiman in 1960. Today, traditional laser technologies are based on CO2 and yttrium aluminum garnet (YAG), which combine to create the high-powered beam. The differentiating factor between traditional and fiber-based lasers is that the latter uses semiconductor diodes to create the actual beam. While the technical aspects are difficult to understand, the benefits that fiber-based lasers provide are simple. IPG’s fiber lasers are greener than conventional lasers, as they: (1) are up to 15 times more efficient than their traditional peers, (2) offer lower electrical consumption, (3) have lower cooling requirements, (4) are more versatile in term of their uses, and (5) use no consumables involved in replacing lamps or bars.
This superior laser technology is not too good to be true. IPG has over 200 patents helping them sustain a competitive advantage for their low-cost/high-efficiency products. IPG’s competitors have found ways to dodge these patents and produce fiber-based lasers, but IPG remains the world leader in this emerging technology. The table below shows how IPG fares with Coherent, Inc. (NASDAQ:COHR), Rofin-Sinar Technologies (NASDAQ:RSTI), Newport Corporation (NASDAQ:NEWP), and II-VI, Inc. (NASDAQ:IIVI).
When comparing these numbers, it’s important to take into account that IPG has the longest history and the largest market share in its respective industry. Coherent will formally release a high-power fiber laser platform, with the first volume orders expected in fiscal 2013. Rofin-Sinar made acquisitions to build their first fiber-based laser platform, which has helped the company grow revenues quite substantially in 2012. Newport also made a few acquisitions earlier this year that helped expand their fiber-based laser product offerings. II-VI produces tools for laser material processing, including modular laser processing heads for fiber lasers.
Looking at the valuation metrics, IPG is more expensive than all of their comparables, as their shares and are trading at 22.34 times their earnings, 5.79 times their sales, and they have an EV/EBITDA of 12.22. Newport is the cheapest among these comparables and is trading at 7.66 times their earnings, 0.77 times their sales, and they have an EV/EBITDA of 7.12. IPG has grown revenues faster than all their comparables, sporting a five year compound annual growth rate of 27.1%. This is nearly double that of II-VI, and dwarfs Coherent, Rofin-Sinar, and Newport, each of which sport a 5-year CAGR in the single digits. The world leader in fiber based lasers also excels over their competitors in terms of ROA, ROE, profit margin, and operating margin, with Newport being the least efficient from an ROA and operating margin standpoint. Rofin-Sinar isn’t too much better, as the company is in the bottom two in every category.
Taking a look at shareholders, Dr. Valentin P Gapontsev is the founder, chairman and CEO of IPG and owns approximately 38% of shares outstanding. Chuck Royce, the manager of Royce & Associates, is the most bullish hedge fund in IPG. Royce increased his position in IPG by 55% from the first to the second quarter, and reported owning nearly 2.2 million shares in his most recent 13-F filing with the SEC. As we can see in the “YTD return” in the graph above, Royce has to be happy with his decision to increase his position in IPG (see what stock Chuck Royce got burned on).
After beating both of its top and bottom line estimates for the third quarter of 2012, shares of IPG shot up over 34% and reached their 52-week high at $65.77. IPG has performed extremely well throughout the entirety of 2012, but risks do lie ahead for the company. Roughly 30% of revenues come from Europe, competitors have made advances in fiber lasers, and their CEO has significant influence on the company and could block any potential buyout. Although IPG isn’t cheap by most standards, they have a superior product and have been crushing the competition with their superior product offerings.