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It has been about a month since the last earnings report for IPG Photonics (IPGP). Shares have lost about 8.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is IPG due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
IPG Photonics Q4 Earnings & Revenues Improve Y/Y
IPG Photonics Corporation delivered fourth-quarter 2020 earnings of 92 cents per share, reversing the loss of 8 cents reported a year ago. Management projected earnings between 75 cents and $1.05 per share. Notably, an unfavorable foreign-exchange movement curtailed 7 cents from bottom line and a goodwill impairment charge reduced it by 20 cents.
Revenues of $336.6 million improved 10% on a year-over-year basis. IPG Photonics anticipated revenues in the range of $290-$320 million.
The company delivered better-than-anticipated results as strong bookings growth for frame agreements in China drove its performance. The company anticipates gaining from strength in new products, low-cost production capabilities, technology differentiation and an expanding global presence in 2021.
Revenues by Application
Materials processing (90% of total revenues) increased 10% year over year to $302.7 million on higher demand for cutting applications.
Revenues from other applications (10%) improved 12% year over year to almost $34 million, driven by the growing traction from advanced applications and a solid uptick in devices utilized in medical procedures.
Quarter in Detail
Sales of high-power continuous wave (CW) lasers (55% of total revenues) were up 17% from the year-ago quarter’s tally.
Management noted growth in ultra-high power fiber lasers (6 kilowatts of power or greater), which represented 56% of all high-power CW laser sales.
By geography, sales surged 52% in China and declined 5% in Europe, 29% in Japan and 11% in North America on a year-over-year basis.
During the fourth quarter, emerging product and application sales contributed 28% to total revenues and climbed 22% year over year as well.
IPG Photonics reported a gross margin of 43.6%, which expanded 310 basis points (bps) on a year-over-year basis. This can be attributed to low-cost production capabilities, higher revenue base and a favorable product mix. Management noted that an additional inventory charge of $14 million contracted the gross margin by 410 bps.
Operating expenses declined 34.1% to $81.6 million. As a percentage of revenues, operating expenses contracted from 40.4% reported in the year-ago quarter to 24.3%. Operating margin came in at 19.4% compared with the year-ago quarter’s figure of 0.1%.
Balance Sheet & Cash Flow
As of Dec 31, 2020, IPG Photonics had $1.391 billion in cash & cash equivalents and short-term investments compared with $1.302 billion as of Sep 30, 2020. As of Dec 31, 2020, total debt (including current portion) came in at almost $38 million compared with $38.9 million as of Sep 30, 2020.
The company generated $85 million as cash flow from operations compared with the prior-quarter figure of $70 million. The company did not repurchase any stock during the fourth quarter. Capital expenditures came in at $26 million compared with $25 million in the prior quarter.
Challenging business environment due to global economic downturn amid coronavirus-induced crisis remains a headwind. Nevertheless, management anticipates gaining from a solid order flow for frame agreements and bookings in China, which was strong “in the first weeks of the year”.
Also, improving investment cycle, led by equipment upgrades, automation, growing demand for flexible processing and higher efficiency, remain tailwinds.
Revenues from the core materials processing market are expected to rise on the back of momentum in higher power products. The company is optimistic about its ability to grow in other applications beyond cutting and welding, which include budding avenues across electric vehicle battery processing and advanced applications as well as devices used in the medical and micro-processing industry. Moreover, strength in new solutions holds promise.
For first-quarter 2021, IPG Photonics anticipates sales to be $310-$340 million. Earnings are projected between 90 cents and $1.20 per share with the mid-point of the guided range being $1.05.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 11.88% due to these changes.
Currently, IPG has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, IPG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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