Will Strong Product Adoption Drive IPG's (IPGP) Q4 Earnings?

IPG Photonics (NASDAQ:IPGP) is set to report fourth-quarter 2017 results on Feb 16. Notably, the company’s earnings have outpaced the Zacks Consensus Estimate in all the trailing four quarters, with an average positive surprise of 14.7%.

In the last quarter, IPG reported earnings of $2.11 per share, beating the Zacks Consensus Estimate by 32 cents and advancing 64.1% year over year. The strong growth was driven by higher sales, which surged 47.6% from the year-ago quarter to $392.6 million.

We believe strong adoption of fiber lasers over conventional lasers and non-laser cutting and welding equipment are driving IPG’s growth. Moreover, with a proper blend of improved manufacturing efficiency, cost reductions, favorable product mix coupled with customer credit management and global administration, IPG is poised to enjoy steady growth.

Guidance & Estimates

IPG expects sales in the range of $330-$355 million for the fourth quarter of 2017, reflecting 18-27% growth from the year-ago quarter. The Zacks Consensus Estimate for revenues is pegged at $347.2 million.

Earnings are projected in the range of $1.55-$1.80 per share, which reflects an increase of 12-30% from the year-ago quarter. The Zacks Consensus Estimate for the same is pegged at $1.74 per share.

Notably, shares of IPG have gained 100.1% in the past year, substantially outperforming the 32.6% rally of the industry it belongs to.

Factors to Influence Q4 Results

Sales in Europe and the United States increased 50% and 13% year over year, respectively, in the last reported quarter whereas sales in China were up 70% and represented almost 45% of total sales. This portrays strong global adoption of IPG’s product portfolio. Management expects the trend to continue this quarter.

Moreover, acquisitions have helped the company expand its product portfolio. During the quarter, the company acquired Laser Depth Dynamics (LDD) to optimize the usage of lasers in the manufacturing industry. We believe that integration of LDD with IPG’s own welding solutions portfolio will boost adoption of the solutions across multiple industries that require automated production facilities.

IPG is gradually expanding into new end-markets like advanced applications (3D Printing, Cinema, and micro-materials processing), communications and medical based on robust product portfolio and strong intellectual property (IP). These have a total addressable market (TAM) of $2.4 billion, which presents significant growth opportunity.

Further, we believe that IPG's vertically integrated business model is a key differentiator. This will not only help it to maintain technological lead but also keep costs of production lower. This will aid the company to continue investments in product development.

However, intensifying competition from the likes of Coherent, Fanuc Corporation, Mitsubishi Cable Industries and seasonality in Chinese markets may prove to be headwinds.

Zacks Rank and Stock to Consider

IPG carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Facebook, Inc. (NASDAQ:FB) , The Trade Desk Inc. (NASDAQ:TTD) and Paycom Software, Inc. (NYSE:PAYC) . While Paycom sports a Zacks Rank #1 (Strong Buy), Facebook and The Trade Desk carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Paycom, Facebook and The Trade Desk have a long-term expected earnings growth rate of 25.75%, 26.51% and 25%, respectively.

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