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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (58048)	9/22/2016 7:09:36 PM
From: Spekulatius	Respond to of 78700

IPGP is the leader in their industry (high power fiber optics lasers). They have shown tremendous growth and have great margins, but the competition isn't sleeping either. This is not a franchise where brand name and market share wins necessarily. IPGP needs to win though the performance of their products - and so far they are doing just that. I think it is a good stock to keep an eye on and probably cheap enough for a purchase.

To: Paul Senior who wrote (58048)

10/4/2016 4:50:50 PM

From: Graham Osborn

Read Replies (2) | Respond to of 78700

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).