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Risk-Reward With Coherent

- By Jonathan Poland

Coherent Inc. (COHR) is the leading provider of laser solutions used in scientific research as well as commercial and industrial applications.

Business is good and the company's financial performance has never been better, with earnings and revenue up 800% and 220%. Thanks to share buybacks, the book value and earnings per share figures have grown faster than the market, pushing the stock price over $320 a share at the start of 2018. However, a few quarterly earnings misses, coupled with a trade war, have sent the stock down almost 200 points since January.


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Sales slumped 6% to $461.6 million in the recently reported fiscal fourth quarter, marking the first year-over-year decline since early 2016. Earnings on an adjusted basis were down 17% to $2.47 per share. Despite being based in California, it generates the majority of its revenue overseas, and economic volatility across both the Pacific and Atlantic Oceans has put enough pressure on Coherent's stock to be worth buying at 13 times earnings.

The next couple of years are going to be bumpy, but much of the bad news is already baked into the stock at this point. After five years of spectacular sales growth, the company looks for a 5% decline in 2019. Yet, earnings per share should still come in above $11 per share. Multiply that by the company's average price-earnings ratio (29.2) and the stock could surpass the $320 per share mark again in the next 15 months.

Looking forward, Coherent's lasers are used in the making of OLED Flat Panel Displays, which are expected to increase in production over the next several years as more than 20 new production facilities are coming on line to meet the growing adoption rates by cellphone manufacturers. For example, Apple's (AAPL) new iPhone's have the OLED panels for the best color accuracy in the industry. The continued buildout will drive demand for Coherent's Linebeam laser systems and make OLED the technology of choice for handheld devices of all price points.

Bottom line

There's a lot to like about Coherent at this price. Besides the growth stated above, its returns on equity (20%), returns on assets (11%) and returns invested capital (16%) are top notch. Additionally, low capital expenditure and research and development costs keep the gross margins above 40%. Growth will slow, but lasers will continue to be used in technologies that we currently take for granted to those we desperately need like solar cells and life sciences. A market capitalization of just $3.2 billion seems very low for a company at the future's leading edge.

Disclosure: I am not long or short COHR.

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This article first appeared on GuruFocus.