Saturday, February 16, 2013

IPG Photonics ( Nasdaq - IPGP ) -- Margins Compress

IPG Photonics reported excellent on target Q4 results.  Performance was affected by the punk macro economic backdrop.  European business was especially slow.  Despite that sales achieved our estimate, improving 17% to $145.0 million.  Earnings were a nickel above our projection at $.69 a share (+3%).  Manufacturing margins declined to 51% compared to 53% in the year ago quarter.  IPG Photonics aims for a range of 50%-55%.  Product mix was the main factor behind the decline.  Competition began to emerge for the first time, moreover.  IPG Photonics created the high power fiber laser industry.  Other laser producers have a background in Yag crystal and CO-2 gas systems.  Fiber units eclipsed the older technologies in 2011 and have been gaining market share ever since.  Competitors have been racing to develop fiber systems of their own.  IPG Photonics remains far ahead in terms of overall price performance.  But competitors have zeroed in on some niche markets.  And while their production costs are substantially higher for now they are pricing aggressively to gain a foothold in the business.

Large scale users continue to rely on IPG Photonics.  New applications are being developed, moreover.  So even if competitors take slices of the company's existing markets overall volume is poised to keep rising.  The fiber category is likely to capture a larger portion of the overall laser industry in future years, as well.  Margins probably will come down a little bit as IPG Photonics enters new areas and competition exerts a modest degree of pressure on the more straighforward parts of the business.  But profitability is poised to stay high as IPG Photonics sustains its industry leading technology.

Our 2013 forecast assumes more economic weakness.  If demand picks up a significantly better showing could develop.  For now we estimate sales will climb 15%-20% to $650-$675 million to provide income of $3.15-$3.35 a share.  Longer term growth might be amplified with acquisitions.

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