Value Investing Forum

Maker of fiber lasers which are used in a wide variety of industries for welding, cutting, drilling and etching. See the video demonstrations of IPG Photonics lasers and their competitor Trumpf.

http://www.youtube.com/watch?v…..4pwqef3Tzw

http://youtu.be/VkNK2mHPS3E

IPGP also makes amplifiers.

Why is it Cheap? / Is it Cheap?

• Difficult to determine whether it is cheap according to value investing rules.
• $2B market cap company with rapid growth company.
• If sales growth continues, it could very well be cheap.

Management

• CEO Gapontsev is founded the company in 1990 and his entire career started with lasers.
• PHD and previously a scientist who has pioneered the advancement of fiber laser.
• Executive team all have extensive history and experience in the laser industry.
• CEO own 19.9% of the stock under his name but if you include holdings via his trust and other associated companies and he owns roughly 42% of the company.
• Total executive compensation was 1.5% of total revenue in 2010. Very good because they thrashed their performance goals.
• Mostly all option exercises or selling. No open market buys. Stock price has rocketed up so selling is expected.

Growth

• Use of lasers is gaining tractions in all industries. Nobody manually welds, cuts and drills anymore. Everything is automated via robotic lasering.
• Fiber lasertechnology is still very young which will replace the existing gas (Co2) and YAG lasers being used today.
• Fiber lasers are cheaper, little to no maintenance required and smaller which is why companies have been buying the product in droves.
• Backlog shows a huge increase in confirmed sales compared to prior year.
• The product is not just limited to one industry. Industries currently using the lasers include material processing for general manufacturing, automotive, aerospace, consumer and semiconductors. Also used in communications industry and medical.
• A very innovative company and they continue to seek new ways lasers can be applied.

Strategic Advantage/Moat

• Complete vertical integration means IPGP has created everything in house required to make the fiber lasers. From semiconductors, amplifiers, manufacturing tools, components, SW and every technique they use.
• This vertical integration means reduction in component and final product cost, better access to critical components, better control over quality and performance, enables rapid development of technology and new products.
• Doing everything in house leads to excellent margins.
• IPGP pioneered fiber lasers and they have the know how and trade secrets to stay ahead of the competition.
• Their level of expertise exceeds competition and according to an insider who has used IPGP and competitor lasers, he has stated that it is the best product on the market.
• Owns hundreds of patents
• Diversified customers and sales region. North America makes up 20.6% of sales, Europe is 37.6%, Asia and Australia is 41.3%.

Competitors

• Lots of competitors who are coming out with their own fiber lasers
• Ahead of the competitiion in terms of product quality and price
• Some public competitors http://seekingalpha.com/articl…..-portfolio
• Compared to the competitors, IPGP is head and shoulders above them.

Risks

• CEO is 72 years old. It has been his vision and expertise that has driven this company forward. Will the company be able to continue its surge without him?
• Cyclical. Relies on capex by companies in order to make sales. 2009 saw a big drop of 20% in revenue with an increase of 60% in revenue upon an improved economy.
• Laser prices are going down. Margins could decrease.
• High fixed cost due to in house development. If capacity is not utilized, margins will compress as evident in 2009.
• Subject to litigation. Already involved in several lawsuits where IPGP was alleged of infringing on competitor patents but won.
• Because the entire process is done in house, IPGP has a limited number of suppliers of some components and raw materials.
• A lot of business comes from Europe. 37.6% of sales from Europe. Global slowdown will seriously affect the company.
• CEO controls 42% of the company. Buyouts, mergers will be unlikely as he can block it.

Valuation

• Need to look at it from a growth point of view.
• FCF is positive but a lot ofthe capex is due to growth capex. Use owner earnings calculation and the numbers look much better and shows huge growth on the bottom line as well.
• Breakdown of inventory shows a huge jump in raw materials and works in progress. IPGP is working to fill orders.
• Huge margins and it has continued to increase. In 2004, gross margin was 42%. TTM is 60%.
• With all the orders IPGP has been receiving, net margin is 25%. During a recession, it was down to 3%. Huge difference. Best to wait until a full blown recession before buying IPGP unless certain that the economy will continually improve.
• ROIC is around 12% average. CROIC is horribly low however at 1-2%. Not the best in returns due to high spending on growth.
• Rather than try to determine the value, better to try to figure what the market is implying for growth stocks.
• Reverse DCF with $90m FCF and 12% discount rate shows 23% growth rate. A discount rate of 9% shows 18% growth rate.

Catalysts

• Improvement in world economy
• Greater adoption of fiber lasers
• Increase the industries in which they can sell their products

Verdict

• Management: B
• Growth: A
• Moat: A
• Risk: B-
• Valuation: C
• Overall: B+

Conclusion
Fast growing company positioned attractively as it can sell its products to several industries for numerous applications. Has many advantages over its competitors and strong margins.

The main concern is the valuation of the company. Putting IPGP on my watchlist to wait for the day the economy collapses. Then it will be time to buy.