IPG Photonics (IPGP) is a company that develops and manufactures a variety of lasers, and has outperformed its industry's growth for several years. The company's balance of price to performance gives it an advantage over its competition in this volatile high power fiber laser market. The company has done a great job at managing its costs and has grown revenue by over 175% since 2009, despite an unstable market. It looks as though IPGP remains a fast-growing company that could become a great long-term investment. The problem is that IPGP has a tendency to trade with excessive volatility and may be near the top of its range.
In July 2010 IPGP began to break out. Over a period of one year it led the market in performance and reached excessive valuations with a P/E ratio above 40 and a price/sales that exceeded 8.50, which is expensive for a laser company. Its rally was a result of the company continuously increasing its guidance and the stock trading higher to meet expectations. However, once the market priced in its guidance and the company was simply "meeting" expectations its stock began to fall, and declined more than 50% in the final six months of 2011.
So far in 2012 the stock has continued its trend of volatility and is now priced near the top of its range. The difference is that the stock is actually priced with fundamentals. The stock has rallied 90% in 2012, reaching $60 in February only to fall below $40 in July. Over the last three months the stock has risen back above $60, to $64, with a 50% gain. It seems sensible that the stock would now decline and continue its trend. But like I said, this time may be different, because the company has continued to post fundamental growth despite the volatility.
IPG Photonics operates with $355.34 million on its balance sheet, with very little debt, and $138.81 million in operating cash flow. The stock is now trading with a forward P/E ratio of 18.80, a price/sales of 6.32, a PEG ratio of 0.84 which all suggest growth. The company has completed acquisitions, including laser systems supplier JPSA, and has continued to raise guidance. The future looks bright, the stock looks fairly valued, and investors appear optimistic. Yet despite these factors investors must remember that this is a volatile stock and that it is at the top of its range.
Eventually, if IPGP continues to acquire companies, post earnings growth of 20% year-over-year and remain fairly valued it will climb to new highs. It is possible that IPGP could continue to trade higher and reach new highs that far exceed $80. However, with all things considered, I think investors should trade with caution and understand that this is a stock that has been good to buy on the falls and to avoid at the top. It is a growing company and should trade higher long-term, but after a 90% YTD gain with 50% during the last month, I'd watch for a pullback and at that point it should be a good opportunity to invest in this fast growing company.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IPGP over the next 72 hours.