I've just come through a very interesting three weeks, prior to and immediately after two of the leading industrial laser companies, IPG Photonics and Coherent announced period financial results and participated in the follow-up Earnings Calls.
Those who know me realize I do not use this blog for reporting company financial results that may, or may not, affect the stock market. And (disclosure here) I am not invested in any industrial laser-related manufacturing companies—maybe for good reason, as the following anecdote illustrates.
As I am well known (bit of backslapping here) from my long association with this industry, the past three decades as a consultant to and on this manufacturing sector, and at the very least for my 32 years of publishing the Annual Economic Review, I am one of the go-to guys when certain industry situations arise.
So it's no surprise that, shortly before the industrial laser-related companies issue periodic financial reports, my phone call, email, and text message activity picks up. This latest period was about normal, until IPG Photonics (2nd quarter) and Coherent (3rd quarter) financials were released. Then, my cell phone hardly stopped ringing for two days, as concerned investment companies and advisors, and for a few days other industrial laser companies, sought an opinion on the short- and medium-term industrial laser applications markets. For the record (another disclosure), I do not and have never commented to the general public on the stock market. Except now.
For those unaware (you must have been climbing Mount Everest), an earning/share drop of $0.01 below expectations and an 11.9% revenue increase (some $4 million below consensus), plus comments made by IPG Photonics company officials, seemed to cast a shadow on future market conditions, leading the company to restate estimates of 2018 revenue growth to 7-9% (from 10-15%).
These effects precipitated a selloff of IPG Photonics stock at one point, dropping 27%. The numbers' miss can be explained by what Peter S. Cohan, an analyst who has tracked IPG for years, calls the beat-and-raise theory of why stocks move up and down: "Stocks will rise if a company exceeds revenue and earnings expectations held by Wall Street analysts each quarter and raises its forecast for future quarters. Otherwise, stocks plunge. To get an idea of just how much they will plunge, if a company reports below-expected revenue and earnings growth and lowers its guidance for the future, you need look no further than IPG's second quarter report."
Apparently what really got Wall Street's attention was the stated lower-than-expected revenue guidance for the 3rd quarter, and comments that seemed to suggest rivals were gaining market share. Otherwise, this company's report was very good. The unanticipated market response was thankfully halted on the second day as investors read—more carefully—IPG's Earnings Report and respected analysts made more measured comments.
Coherent, on the other hand, had previously conditioned investors on conditions in the flat-panel display industry (its major market for high-power excimer equipment) and wisely used their earnings report for an update on growth in other markets. However, maybe mirroring IPG's on future industry revenue growth and potential market lethargy, Coherent stock took a 23% hit.
Why do these two companies deserve such stock market response? They are two members of the four-member Industrial Laser Billionaire Club and between them made up about 50% of 2017 industrial laser revenues. If one should hiccup, they get investor attention--when both do, they get agitia heartburn. Disserved or not, the first days of August for each were a testing ground for their financial management.
When I prepare my review of the markets for industrial lasers, systems, and related products, it's not from an investment perspective—a view formed partly by emotion as much as by reality—it's based on reviews of the global manufacturing situation, a deep knowledge of the industrial laser suppliers and markets they serve, plus—I hope—a good dose of common sense gained from a career in this technology.
Since I am not an investor in this market, the spurt of calls I received took me by surprise and it wasn't until I began to get analysts' comments that the scope of Wall Street's reaction hit me. Things have calmed down a bit as wiser heads read both companies remarks more carefully and looked at the financials in light of past performance.
I'm still assessing the fallout by tracking the stocks throughout the day and paying closer attention to potential mitigating factors than I would as a non-investor. It's only a few weeks until I start assembling backup for the preparation of the ILS Annual Economic Review and with the pending all-important mid-term elections in the U.S. coming up just as I begin to draft the review, adding to the potential drama in the laser markets, it will be a challenging time.