Company Overview: IPG Photonics Corporation (NASDAQ: IPGP) is a company that develops, manufactures, and sells high-performance fiber lasers, fiber amplifiers, and diode lasers for a variety of applications, primarily in materials processing. IPGP sells to original equipment manufacturers (OEMs), system integrators, and end-users. IPGP sells its goods worldwide, primarily through its direct sales force. IPGP has large manufacturing sites in the US, Germany, Russia, and Belarus.

IPGP Details

Key Takeaways from FY21 (ended December 31, 2021)

• Boost in Revenues: The company's net sales in FY21 were USD 1.46 billion, up 21.66% from USD 1.20 billion the previous year.
• Sharp Uptick in Operating Income: The company's operating income in FY21 was USD 367.88 million, up 85.18% from USD 198.66 million in FY20.
• Expansion in Bottomline: Net income was USD 277.87 million in FY21, compared to USD 160.34 million in FY20, representing a diluted EPS of USD 5.16.
• Surge in Backlog: IPGP's backlog of orders (usually slated for shipment within one year) was roughly USD 729.0 million at the end of December 2021, compared to USD 673.7 million at the end of December 2020.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• IPGP announced on March 03, 2022, that its Russian facilities would continue to function and manufacture optical components and finished products for its operations in the United States, Germany, and China. On the other hand, Sanctions will lengthen lead times and increase the cost of shipping components and lasers to and from IPGP's Russian facilities.
• IPGP allowed the purchase of up to USD 200 million of its common stock on February 15, 2022. This new authorization is in addition to the company's existing stock repurchase program, approved in May 2020 and has roughly USD 80 million of repurchase capacity remaining.

Other Key Findings in FY21

• China accounted for most of IPGP's sales in FY21, with USD 548.35 million vs. USD 502.28 million in FY20.
• Its North American sales climbed to USD 314.98 million in FY21 from USD 246.19 million in FY20, making it the second most revenue-generating geography.
• High Power Continuous Wave (CW) Lasers accounted for most of IPGP's revenue in terms of product sales.

Sales Mix; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Improvement in Cash Balance: As of December 31, 2021, the company has a cash balance (including short-term investments) of USD 1.51 billion, up 8.87% from USD 1.39 billion as of December 31, 2020.
• Improvement in Cashflow from Operations: Net operating cash inflow in FY21 was USD 389.70 million vs. USD 285.34 million in FY20.
• Progress in Investing Activity: For the twelve months ended December 31, 2021, net cash used in investing activities increased to USD 416.28 million, up from USD 99.57 million the previous year. This adjustment was triggered by USD 123.11 million in fixed asset purchases and USD 1.94 billion in short-term investments.

Key Metrics: In FY21, IPGP's EBITDA and net margins were 30.7% and 19.0%, higher than the industry median of 15.1% and 4.4%, respectively. The ROE has been improved to 10.4% in FY21 from 6.4% in FY20.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 57.38% of the total shareholding, while the top 4 constitute the maximum holding. Valentin Gapontsev Trust I and IP Fibre Devices (UK), Ltd. hold the maximum stake in the company at 14.05% and 13.06%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Customer Concentration Risk: In FY21, FY20, and FY19, IPGP's five largest clients contributed 19%, 24%, and 21% of net sales, respectively. The company's financial and operational health may be jeopardized in the future if it places too much reliance on a few key clients.
• Supplier Concentration Risk: IPGP purchases raw materials and components such as semiconductor wafer substrates, diode packages, modulators, micro-optics, bulk optics, and high-power beam delivery devices from single or limited-source vendors. As a result, the company's commercial and financial status may be jeopardized if these vital raw materials are not obtained from any of these vendors.
• Decline in ASPs: IPGP's products are experiencing and may continue to experience a significant reduction in average selling prices (ASPs) due to new product and technological innovation, increased competition, and pricing demands from essential clients.
• Dependence on OEM Clients: IPGP's revenue depends partly on its ability to retain and acquire existing Original equipment manufacturer (OEM) clients. Its laser and amplifier sales are also influenced by OEM customers' ability to integrate them.

FY22 Outlook:

• Looking ahead, IPGP is moving away from China's extremely competitive high-power cutting industry by seeking profitable development prospects for its products in electric car applications, renewable energy, handheld welding, medical sectors, and ultrafast lasers.
• It anticipates a moderate total revenue growth rate of 3 - 6% in 2022, with non-cutting applications showing strong growth. In the medium to long term, it expects double-digit total revenue growth.
• Further, IPGP predicts revenue of USD 320-350 million in Q1FY22. The company anticipates a tax rate of around 26% in the first quarter. It expects earnings per diluted share to be in the range of USD 0.85 to 1.15.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: IPGP corrected ~48.97% over the past nine months. The stock is currently leaning towards the lower band of its 52-week range of USD 103.05 to USD 241.43. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its market dominance in the Laser Fiber Technology space, strong profitability margins, insignificant leverage, and strong global market presence. We have taken peers like nLIGHT, Inc. (NASDAQ: LASR), Advanced Energy Industries, Inc. (NASDAQ: AEIS), and others. Considering the strong top and bottom-line performance, healthy balance sheet, robust backlog, underutilized capacity, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 105.56, down ~4.73%, as of March 14, 2022, at 9:34 AM ET. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

IPGP Technical Chart. Data Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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