A month has gone by since the last earnings report for IPG Photonics (IPGP). Shares have added about 7.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is IPG due for a pullback? 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 Tops Q3 Earnings, Revenues Miss Estimates
IPG Photonics Corporation delivered third-quarter 2018 adjusted earnings of $1.87 per share, beating the Zacks Consensus Estimate by a couple of cents. Taking into account the impact of foreign currency, earnings came in at $1.84 per share. However, earnings decreased from the year-ago figure of $2.11 per share.
Revenues declined 9% from the year-ago quarter to $356.3 million. Foreign currency exchange impacted sales by roughly $5 million. Moreover, macroeconomic environment and geopolitical factors reduced demand in China which impacted the third-quarter revenues. Further, the figure lagged the Zacks Consensus Estimate of $359 million.
Materials processing declined 11% year over year, owing to weakness in 3D printing, metal welding and cutting applications. Notably, it accounted for approximately 94% of total sales.
Nonetheless, revenues from other markets increased 22% year over year, primarily due to growth in communications and government applications.
Geographic Revenue Details
China reported year-over-year sales decline of 9% and represented 45% of total sales. Sales in Japan increased 4% from the year-ago quarter. Sales in North America grew 29% year over year. However, sales in Europe decreased 25% from the year-ago quarter.
Sales of high-power CW lasers (64% of total revenues) declined 7% from the year-ago quarter, primarily owing to weaker-than-expected demand in China and Europe. However, management noted that demand for 6 kilowatt ultra-high power CW lasers gained momentum.
Medium-power CW laser sales slumped 48% year over year, due to weakness in additive manufacturing and cutting. Pulsed lasers sales decreased 11% year over year.
QCW lasers sales fell 23% year over year, primarily due to due to lower-than-demand of consumer electronics investment cycle. Other products revenues increased 10% year over year on the back of robust sales growth in systems and beam delivery accessories.
IPG Photonics reported gross margin of 54.8%, which contracted 242 basis points (bps) on a year-over-year basis. This can be attributed to higher manufacturing cost and lower revenue base.
As a percentage of revenues, operating expenses increased 410 bps year over year, primarily due to higher investments in sales, engineering and administrative expenses. Consequently, operating margin contracted 605 bps from the year-ago quarter to 35.2%.
Balance Sheet & Cash Flow
IPG Photonics ended the third quarter with $1.12 billion in cash & cash equivalents and short-term investments as compared with $1.125 billion reported in the previous quarter. Total debt outstanding was $46 million down from $47.2 million in the previous quarter.
The company generated $72 million in cash flow from operations down from the previous quarter's figure of $208.6 million.
During the third quarter, IPG Photonics repurchased 371k shares worth $61 million under the share repurchase authorization program.
Owing to macroeconomic headwinds, foreign exchange currency fluctuations and geopolitical tension the company provided soft fourth-quarter guidance. Further, IPG Photonics lowered fiscal 2018 guidance owing to tariffs and trade associated challenges in China and Europe.
IPG Photonics expects sales in the range of $300-$330 million for the fourth quarter of 2018.
Earnings are projected in the range of 1.30-$1.50 per share.
For 2018, management lowered the outlook. IPG Photonics now expect revenue growth in the range of 1-4%, down from the previous projection of 7-9%, citing currency exchange fluctuations.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -20.78% due to these changes.
At this time, IPG has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise IPG has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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