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IPG Photonics (NASDAQ:IPGP) appears on track to report good Q4 results. The company is the leading supplier of fiber optic lasers used to a large degree in industrial applications. The technology is displacing established crystal and gas powered lasers with a combination of superior performance characteristics and declining prices. It also is beginning to replace other types of processes that up to now haven't used lasers. Demand took off in 2010 after IPG Photonics matched CO-2 and YAG laser prices in a wide range of applications. Customers flocked to the technology because the cost of ownership for laser systems is much lower. Those units consumer less power. They also require less maintenance. IPG Photonics machines additionally are smaller, and the beams of light that are generated are easier to control. Midway into 2011 order rates plateaued while shipments continued to build, leading to book-to-bill ratios of less than 1.0x in Q2 and Q3. Customers were scaling back at that point due to the slowdown in the world economy. (About two-thirds of sales are international.) Then business came to something of standstill in October as the European crisis intensified. While the company's long term potential remained intact, near term performance became a nerve wracking question mark.

Order rates stabilized in November. Then demand improved further in December as customers threw their hands in the air and said the heck with the politicians, they were moving forward. In December the world of business eclipsed the world of politics and central banking. That trend has continued into early January. First quarter results typically decline sequentially, which is customary for most capital equipment manufacturers. But IPG Photonics's order flow reportedly is holding up at normal levels despite the commotion in Europe and rumors of (fill in the blank) in China.

We have reduced our Q4 earnings estimate by a nickel to $.61 a share (excluding non cash stock option expense). We also have lowered our sales estimate by $10 million. We've been far more optimistic than most analysts following the company, figuring that the company's superior technology was going to prevail. These are minor adjustments considering the amount of external pressure being exerted. For the entire year we now estimate income will finish at $2.50 a share (+110%) on sales of $475 million (+59%).

Our 2012 earnings estimate is unchanged at $2.85 a share (+14%). We have reduced our sales estimate to $550 million from $575 million, but IPG Photonics has implemented significant cost reduction programs that promise to sustain profit margins at elevated levels. Competition in the fiber laser segment remains scant. IPG Photoniocs still commands about 75% of the market. Most of the rest consists of niche applications that the company probably could take over if it became worth its while. Our projections assume the economy remains depressed. If a genuine recovery takes place significantly higher results could be obtained.

The long term outlook remains exceptional. IPG Photonics holds tremendous cost and know-how advantages against prospective competition. The company is expanding its share of the overall laser market, displacing existing gas and crystal technologies. New opportunities are cropping up as lasers become viable alternatives to existing manufacturing methods. And the company is exploring altogether new markets, one of which, believe it or not, is oil drilling. IPG Photonics's already has been recruited to weld pipeline segments together. The company now is working with drilling engineers to frack with light power instead of dynamite, alleviating earthquake and contamination risk.

This is a great company. The technology is in an early stage of development. Above average growth could be sustained well into the next decade if the technology's potential is fully realized. At 18x earnings, IPG Photonics represents a solid investment opportunity.


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Disclosure: I am long IPGP.

Source: IPG Photonics Shrugs Off Macro Threat

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