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Rofin-Sinar Technologies (RSTI) is a leading developer, designer and manufacturer of lasers and laser-based system solutions for industrial material processing applications. It focuses on developing key innovative technologies and advanced production methods for a wide variety of industrial applications based on a broad scope of technologies. The product portfolio ranges from single laser-beam sources to highly complex systems, covering all of the key laser technologies such as CO2 lasers, fiber, solid-state and diode lasers, and the entire power spectrum, from single-digit watts up to multi-kilowatts, as well as a comprehensive spectrum of wavelengths and an extensive range of laser components.

RSTI has its operational headquarters in Plymouth, Michigan, and Hamburg, Germany and maintains production facilities in the U.S., Germany, U.K., Sweden, Finland, Switzerland, Singapore, and China. Rofin currently has more than 42,000 laser units installed worldwide and serves more than 4,000 customers.

Executive Summary

RSTI's P/B valuations are attractive - its current P/B at 1.21x represents a 21% discount to its five year average P/B of 1.53x. It is a strong and consistent cash flow generator, reflecting in a sizeable net cash of $78.6 million, representing 13% of its current market capitalization of $583.9 million and positive free cash flow generation in nine out of the last ten years. RSTI has been profitable for every year since its IPO in 1996 and has grown revenue and EPS by a ten year CAGR of 9.3% and 18.8%, respectively. RSTI also still has approximately $9.3 million remaining from its $20 million share buyback program announced in August 2012.

RSTI has a 17% global market share in the relevant industrial laser sector and is expected to benefit from the secular trend of lasers increasing market share at the expense of other conventional technologies for processing various kinds of metal and non-metal materials. RSTI has a stable source of recurring revenues from after-sales services, replacement parts and components for laser products, with such sales responsible for 39% of its 2012 sales, and 36% of 2011 sales.

Business Quality

RSTI's growing base of installed laser sources and laser-based systems, with an installed base of approximately over 42,000 laser units, is expected to continue to generate a stable source of recurring revenues from sales of replacement parts and after-sales service. It typically agrees to after-sales service and parts supply up to a period of 10 years, if requested by a customer.

RSTI estimates itself to have a 17% global market share in the relevant industrial laser sector, based on data from the Industrial Laser Solutions magazine's 2012 forecast for industry data. It has sold more than 61,000 laser sources since 1975 and currently has over 4,000 active customers, including multinational companies with multiple facilities purchasing from RSTI.

RSTI expects to benefit from the secular trend of lasers, increasing market share at the expense of other conventional technologies for processing various kinds of metal and non-metal materials in a broad range of advanced manufacturing applications. In recent years, lasers have revolutionized industrial manufacturing and have been used increasingly, as a result of their reliability, flexibility and speed.

Valuation and Financial Analysis

RSTI is currently trading at a trailing twelve months P/E of 17.47 and a trailing twelve months EV/EBITDA of 8.25. RSTI's current P/B valuations at 1.21x represent a 21% discount to its five year average P/B of 1.53x. RSTI achieved a ROE of 7.1% for the past twelve months and a five year average ROE of 9.1%.

Capital Allocation

On August 1, 2012, RSTI announced that the Board of Directors authorized a share buyback of up to $20.0 million of the company's common stock over the next twelve months ending August 10, 2013. RSTI purchased approximately 0.5 million shares of common stock, at an average price of $21.12, for a total price of $10.7 million, as at September 30, 2012.

Investment Risks

Manufacturers in the machine tool, automotive, semiconductor, electronics, and photovoltaic industries were responsible for 69% of RSTI's fiscal 2012 sales. These industries are cyclical and have historically experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including the products manufactured and marketed by RSTI.

RSTI relies on a limited number of independent contractors to manufacture subassemblies for some of its products and estimates that 13% of its revenues are derived from sales of products that require specialized components only available from single sources. Furthermore, RSTI indicated that some of its suppliers may need at least nine months of lead time, for it to substantially increase its sales levels of certain products.

RSTI experiences a lengthy initial sales cycle, and needs to expend significant effort in increasing manufacturing capacity and ordering of long lead-time components or materials prior to receiving an order. This is the nature of the industry, where customers often view the purchase of RSTI's products as a strategic decision and spend a long time evaluating, testing and qualifying products before making a decision.

Source: Rofin-Sinar Technologies: 39% Of 2012 Revenues Recur Naturally