IPG Photonics (IPGP)
is the worldwide leader in designing, developing and manufacturing optical-fiber based lasers (fiber lasers) that are used, primarily, for marking, printing, welding, cutting and other materials processing applications.
Although the company’s lasers also have applications in medicine and in telecommunications networks to enable voice and data transmission over optical lines, approximately 85 percent of IPG Photonics’ revenues during the year ended Dec. 31, 2010 were derived from sales for materials processing applications.
As a pioneer and technology leader in fiber lasers, IPG Photonics has built leading positions in various end markets with a large and diverse customer base while establishing a well-respected and widely-recognized brand. The company is the leading provider of low and mid-power fiber lasers and amplifiers, and it’s the only significant supplier of high-power fiber lasers. That diverse customer base and leading market position helps the company to mitigate the impact of fluctuations in demand from any particular customer or industry.
IPG Photonics has more than 300 customers worldwide, including BAE Systems, the Gillette division of Proctor and Gamble, Mitsubishi Heavy Industries, Reliant Technologies, and Nippon Steel Corporation.
Approximately 80 percent of the company’s revenues are derived from sales to customers outside of North America, with 38 percent of its revenues coming from sales in Europe and 42 percent from sales to customers in Asia and Australia.
In addition to its U.S. facilities, IPG Photonics maintains manufacturing, research, and development facilities in Germany, Italy, Russia, and India. It has sales offices in the U.S., France, Germany, Italy, and the United Kingdom, as well as in Japan, China, South Korea, Singapore, India and Russia.
The company was founded in Russia in 1990, and it established manufacturing and research operations in the United States in 1998. As of Dec. 31, 2010, the company had approximately 1,760 full-time employees, including 140 in research and development, 1,370 in manufacturing operations, 100 in sales, service and marketing, and 150 in general and administrative functions. Of those employees, 600 were based in Germany, 500 were in Russia, and 490 were in the United States.
Although traditional gas and crystal lasers have been used in certain applications for many years, industry experts expect the demand for optical-fiber based lasers like those produced by IPG Photonics to grow rapidly during the years ahead. That’s because fiber lasers enable industrial manufactures to achieve higher levels of precision than traditional lasers, they’re easily transportable to remote sites (due to their small size and durability), and they’re less costly to maintain than traditional lasers. Fiber lasers are also easier to operate than traditional lasers.
Until recently, optical-fiber lasers were cost-prohibitive for most applications because of the high costs associated with the semiconductor devices used by those lasers to convert electrical energy to optical energy. However, during the past few years fiber devices became more affordable due to technological advancements and to increases in the production volumes of those lasers. As a result of those improvements, the average cost per wattage of output power produced by fiber lasers decreased substantially over the past few years, enabling the company’s fiber lasers to compete effectively with conventional lasers over a wide range of output powers and applications.
Due to the factors and developments mentioned above, as well as the significant advantages offered by fiber lasers in comparison to traditional gas lasers and crystal lasers, industry experts expect companies that operate in the materials processing and medical device industries over the next several years to replace their traditional lasers with fiber lasers like those manufactured by IPG Photonics.
In regard to potential competitive pressures, only a small number of companies make fiber lasers for the materials processing market. IPG Photonics has a very significant advantage over those competitors because it’s the only fiber laser manufacturer that develops and manufactures all of the key components of its products. That vertical integration enables the company to (1) maintain a technological lead over its competitors; (2) reduce component and final product costs as volumes increase; (3) ensure access to critical components; (4) control performance, quality and consistency; (5) enable the rapid development and deployment of new products; and (6) readily meet customer requirements.
The company’s vertical integration also enables it to realize significant cost advantages over its competitors and to respond more quickly to changes in the demand for its products.
IPG Photonics manufactures its own semiconductor diodes — a key component of fiber lasers — as well as other significant laser components and manufacturing tools. Those proprietary components, which IPG does not sell to other laser manufacturers, exceed the performance of commercially available components.
The company also owns its foundry for high-volume manufacturing of semiconductor laser devices. These factors provide IPG Photonics with extensive barriers against potential competitors.
Financial condition, outlook for 2012
IPG Photonics is very strong, financially, with its cash alone equal to approximately 1.2 times the company’s total financial obligations and its long-term debt representing only 9.7 percent of the company’s total tangible assets. Those financial liquidity and solvency statistics are extremely high for an industrial manufacturing company.
In regard to the company’s operating results, except for a temporary setback during 2009 due to the 2008-2009 worldwide economic recession, IPG Photonics consistently grew its revenues and earnings every year from 2004 to 2010, with its revenues increasing to $299.32 million for the year ended Dec. 31, 2010, from $60.7 million for the year ended Dec. 31, 2004, and its net income attributable to common shareholders rising to $54.0 million from $2 million over that same period.
Looking forward, the company’s CFO, Timothy Mammen, said on Dec. 7 at a Barclays conference in San Francisco that revenue and earnings growth rate for the quarter ending Dec. 31, 2011 might “be flat to a little bit down” in response to the economic slowdown in China, and that he expects a “slow start” to 2012 with a “seasonally weak” quarter for the period ending March 31, 2012. However, Mammen went on to say that he expects the company’s revenues to grow in a range of 15 percent to 20 percent if economic conditions improve during coming year.
With my research indicating that worldwide economic conditions will improve considerably during the second half of 2012, and that industrial manufacturers will therefore ramp up their production substantially during that period, I expect IPG Photonics’s financial operating results to improve substantially during the second half of next year.
IPG Photonics’ stock closed today at a price-to-earnings growth (PEG) ratio of only 0.62, indicating that its stock is selling at a substantial discount to the company’s projected growth rate over the next three to five years. My experience suggests that now is a good time to establish a position in this stock.
Note: The author of this article owns shares of IPG Photonics (IPGP).
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