I took a full position in IPGP today. I rejected it outright on first pass after Paul posted due to valuation, but circled back after a screen I designed based on Gorilla Game turned it up independently. Despite the fancy price tag, the company has some characteristics I would associate with a Buffett business - which means it should probably be held for a while. The biggest risk factor (as Paul noted) is probably extrinsic - some sort of industry slowdown in China. We all know there are plenty of ways that could happen. Oh well! Valuation seems fair to good within the comps group. Here are some random notes:
EV < MC
EV/ EBITDA 10
PE 18
ROIC 18%
25% rev and tbook growth
seekingalpha.com
[] China is a very important country for IPG, as it contributed nearly 40% to the quarterly revenues.
[] While operating margins did fall by 210 basis points to 36.8% of sales, this has been driven by foreign exchange losses and not by structural pressure on margins. These headwinds hurt margins by 340 basis points, indicating that the company would have reported incremental margin expansion, if not for these one-time charges.
[] At $75 per share, this means that operating assets of the business are valued at $3.3 billion, at a time when earnings are seen at roughly $240 million a year. This translates into an earnings multiple of merely 13-14 times, after backing out the strong cash holdings. These are arguably very appealing metrics for a business which is enjoying such a leadership position, strong margins and compelling growth.
[] This potential outcomes for 2020 are very wide. If competition does indeed kick in and kills the excess margins, while it slows down the sales growth of IPG Photonics, shares are overvalued at the moment. On the other hand, if the company continues to enjoy great margins and a rapid increase in sales, shares could easily triple from current levels. One thing is for sure, both scenarios are not likely to turn out to become reality, but they just indicate the assumptions behind certain outcomes.
[] This follows the large outstanding short float which is largely based on bets that clients or competitors will develop similar technologies, thereby undercutting the premium pricing of the business. Other concerns is the large reliance on overseas markets, notably the Eastern European & Russian markets as well as China.
[] IPG have some political risk with the Russian operations. I can't say that's a big risk because it's not the sort of thing you can calculate odds for, but maybe management want to hold cash in case of trouble but don't want to draw attention to it.
comps in Ycharts
look at Technology > Semi-equip > 10% rev growth or more
the cash position is competitive in the group
the P/ Tb is low within the group
EV/ Rev and EV/ EBITDA are middle of the pack
Operating PE and PE are low
profit margins and returns on capital are excellent
growth in revs and tbook are excellent
Yahoo app summary
[] 10% short float
FINVIZ
[] institutional ownership 62%
[] 25% profit margin
[] short float only 8% shown here
Financials (Ycharts)
[] working capital of almost 1B -> looks like GOOGL
tiny amount of goodwill
Nasdaq institutional holdings
[] net selling in Q2 by large institutions -> is the institutional bull market over?
10K - Business
[] this seems to be a Buffett-type moat business
10K - Risk Factors
[] as a result of being a vertically integrated company they have high fixed costs which could make their operating profit vulnerable in the event of a recession
[] emerging competition may force down margins
Symbol
| Name
| Currency Code
| Enterpr. Value
| Revenue (5 Year Growth)
| Tangibl. Book Value (5 Year Growth)
| EV to Revenue. (TTM)
| EV to EBITDA (TTM)
| IPGP
| IPG Photonics
| USD
| 3.690B
| 24.67%
| 32.15%
| 4.0
| 9.6
| LRCX
| Lam Research
| USD
| 12.66B
| 12.70%
| 11.84%
| 2.2
| 9.1
| NVMI
| Nova Measuring
| USD
| 226.65M
| 11.39%
| 12.47%
| 1.5
| 9.8
| OLED
| Universal Display
| USD
| 2.296B
| 44.29%
| 47.04%
| 11.7
| 26.2
| SFDMY
| Shanghai Fudan
| USD
| 535.10M
| 18.08%
| 15.66%
| 3.1
| 6.2
| | | | | | | 4.6
| 12.8
|
EV = (EV/ Rev*)*Rev = 4.6*0.927B=4.3B
MC = EV + Cash – LTD = 4.3B + 0.587B – 0 = 4.9B
PT = MC/ Shs = 4.9B/ 0.053B = $92/ sh vs current sh price $82
Price targets are less meaningful for this kind of company because the valuation grows with the business (hopefully). |
