Company Overview: IPG Photonics Corporation (NASDAQ: IPGP) is a vertically integrated developer and manufacturer of high-performance fiber lasers, fiber amplifiers, and diode lasers for various applications. For particular markets and applications, it also provides laser-based and non-laser-based solutions. Materials processing, communications, medicinal, and sophisticated applications all benefit from the company's laser technologies. It supplies its products to original equipment manufacturers (OEMs), system integrators, and end-users worldwide. The company's main manufacturing facilities are located in the US, Germany, Russia, and Belarus.

IPGP Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Boost in Revenues: The company's net sales in Q2FY21 amounted to USD 371.66 million, a 25.39% rise year on year from USD 296.41 million, owing to higher sales across all products.
• Sharp Uptick in Operating Income: The company's operating income for Q2FY21 was USD 92.25 million, up 95.41% from USD 47.21 million in Q2FY20.
• Expansion in Bottomline: Net income was USD 69.68 million in Q2FY21, compared to USD 38.37 million in Q2FY20, representing a diluted EPS of USD 1.29.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• IPGP's founder, Chairman, and former CEO, Dr. Valentin P. Gapontsev, also recognized as the "Father of the Fiber Laser Industry," passed away on October 25, 2021.
• During Q2FY21, IPGP repurchased 184,871 shares of common stock in the open market for USD 209.22 per share under its February 2019 authorization. It repurchased 199,777 shares of common stock in the open market during 6MFY21 at an average price of USD 208.86 per share. As a result, the remaining amount under its programs was USD 205.00 million as of June 30, 2021 (including USD 200.00 million under the May 2020 authorization).

Other Key Findings in Q2FY21

• Asia and Australia accounted for most of IPGP's sales, totaling USD 207.05 million in Q2FY21 compared to USD 176.76 million in Q2FY20.
• Its North American sales in Q2FY21 increased to USD 66.13 million from USD 53.90 million in Q2FY20.
• Sales in Europe and the rest of the world for Q2FY21 were USD 96.09 million and USD 2.39 million, respectively, compared to USD 64.18 million and USD 1.57 million in Q2FY20.
• High Power Continuous Wave (CW) Lasers accounted for most of IPGP's revenue in terms of product sales.

Sales Mix; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Improvement in Cash Balance: The company exited Q2FY21 with a cash balance (including short-term investments) of USD 1.50 billion, up 7.64% from USD 1.39 billion at the end of FY20.
• Improvement in Cashflow from Operations: Net operating cash inflow during H1FY21 was USD 203.19 million vs. USD 130.26 million during H1FY20.
• Improvement in Debt Profile: IPGP's total outstanding debt was USD 36.07 million as of June 30, 2021, 4.99% less than the USD 37.97 million stated total debt as of FY20 end.

Key Metrics: In Q2FY21, IPGP's EBITDA and net margins were 32.1% and 18.7%, higher than the industry median of 14.6% and 7.0%, respectively. The operating margin stood at 24.8% in Q2FY21 vs. the peer average of 8.6%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 56.96% of the total shareholding, while the top 4 constitute the maximum holding. Valentin Gapontsev Trust I and IP Fibre Devices (UK), Ltd. hold the maximum stake in the company at 13.91% and 13.06%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Customer Concentration Risk: IPGP's five largest clients accounted for 23%, 24%, 21%, and 26% of the net sales in H1FY21, FY20, FY19, and FY18, respectively. Such excessive reliance on a few critical clients for income could hurt the company's financial and operational health in the future.
• Supplier Concentration Risk: IPGP buys various raw materials and components from single or limited-source vendors, such as semiconductor wafer substrates, diode packages, modulators, micro-optics, bulk optics, and high-power beam delivery devices. As a result, failure to get these critical raw materials from any of these vendors might be detrimental to the company's business and financial situation.
• Decline in ASPs: Due to new product and technological innovation, greater competition, and price demands from prestigious clients, IPGP's goods are experiencing and may continue to experience a considerable reduction in average selling prices (ASPs).
• Dependence on OEM Clients: IPGP's revenues partly depend on its ability to keep existing OEM clients and acquire new ones. Its sales are also influenced by OEM customers' ability to integrate its laser and amplifier devices.

Q3FY21 Outlook

• Looking ahead, IPGP forecasts its Q3FY21 sales to range between USD 350 – 380 million, representing a 15% year-on-year increase at the midpoint.
• The company also claimed that it is optimistic about its future in its Q2FY21 earnings release, citing strong long-term development prospects due to its industry-leading position in cutting, EV welding, and new product releases (including the LightWELD portable laser).
• Further, the tax rate for Q3FY21 is expected to be ~25%. Assuming 53.5 million basic common shares and 54.0 million diluted common shares outstanding, IPGP expects diluted EPS to be in the range of USD 1.10 – 1.40.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

 Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past nine months, IPGP corrected ~29.21%. The stock is currently leaning towards the lower band of its 52-week range of USD 151.27 to USD 262.55. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its market dominance in the Laser Fibre Technology space, strong profitability margins, negligible leverage, and strong global market presence. We have taken peers like nLIGHT, Inc. (NASDAQ: LASR), Coherent, Inc. (NASDAQ: COHR), and others. Considering the robust top and bottom-line performance, healthy balance sheet, strong track record, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 163.26, up ~2.67%, as of November 01, 2021.

IPGP Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.  

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