The Zacks Laser Systems and Components industry benefits from the growing consumer need for faster and higher precision volume manufacturing techniques with lower power consumption despite the coronavirus fallouts. Moreover, upbeat demand from electronics, semiconductors and healthcare end-markets is a major growth driver.
IPG Photonics (IPGP - Free Report) , Lumentum Holdings (LITE - Free Report) and CyberOptics (CYBE - Free Report) are well-positioned to benefit from these trends. Robust demand for high power continuous wave and pulsed laser for cutting and battery processing applications, growing demand for high-performance optical devices and ongoing adoption of cloud computing, autonomous driving, IoT and 5G are key catalysts for these industry participants.
The Zacks Laser Systems and Components industry comprises companies offering high-performance fiber lasers, fiber amplifiers and diode lasers, high precision 3D sensors, optical and photonic products, and scanning technology solutions. The key end-markets are semiconductor, metrology, advanced communication and medical devices.
3 Laser Systems & Components Industry Trends to Watch Out For
Emerging Applications Driving Demand for Lasers: The industry is benefiting from increasing demand for emerging applications like additive manufacturing, facial recognition, gesture recognition, LiDAR applications and IoT. Advanced lasers, especially those with 3D sensing (3DS) capabilities, are enhancing interactions using technology. Notably, 3DS, the technology that allows users to create 3D printable objects, control games with body gestures and measure objects, is much in demand.
Laser-IoT Combination Supports Efficiency: As industries are increasingly adopting automation techniques, combining lasers with IoT improves operating efficiency. Notably, IoT-supported manufacturing equipment is far easier to update with firmware. The combination not only reduces costs but also increases flexibility and reliability manifold by enabling material handling capabilities through remote sources. Additionally, strong demand from semiconductor and allied markets, which are seeing a rapid shift toward production of micro and nano devices, is a positive for industry participants.
Improving China Market Key Catalyst: Moderate improvement in the China market post coronavirus-induced disruptions bodes well for industry players like IPG Photonics, which has a significant exposure to the country’s industrial laser market. However, weak demand in Europe and North America due to the COVID-19 outbreak is expected to hurt top-line growth, at least in the near term. Moreover the U.S. ban on Huawei is a bother. Inventory build-up at this Chinese tech giant worries its component suppliers, some of whom are customers of the Laser Systems and Components industry players.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Laser Systems and Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #55, which places it in the top 22% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Jun 30, 2020, the industry’s earnings estimates for 2020 have moved up 13.2%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Broader Industry and S&P 500
The Zacks Laser Systems and Components industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has declined 0.3% over this period compared with the S&P 500’s increase of 12% and the broader sector’s rally of 31.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing Laser Systems and Components stocks, we see that the industry is currently trading at 3.83X compared with the S&P 500’s 4.08X. It is also trading below the sector’s trailing 12-month P/S of 4.17X.
Over the last five years, the industry has traded as high as 5.83X, as low as 2.10X and at the median of 4.04X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Laser Stocks to Keep a Close Eye on
CyberOptics: Shares of this Minneapolis, MN-based company have returned 68% year to date. This Zacks Rank #1 (Strong Buy) company is a leading provider of sensors and inspection systems that provide process yield and throughput improvement solutions for the global electronic assembly and semiconductor capital equipment markets. You can see the complete list of today’s Zacks #1 Rank stocks here.
Solid adoption of CyberOptics’ high precision 3D Multi-Reflection Suppression (MRS) based optical sensors for inspection and metrology in key vertical markets like Surface Mount Technology (SMT) and semiconductor are major growth drivers. Its solutions boosts customer yields, throughput and operating efficiency, thereby saving time and expenses. The company has solid growth potential in market for Micro LED inspection, advanced packaging and metrology.
The Zacks Consensus Estimate for CyberOptics’ current-year earnings has stayed at 68 cents per share over the past 30 days.
Price & Consensus: CYBE
IPG Photonics: This Zacks Rank #3 (Hold) company is gaining from strength in its fiber & diode lasers, fiber amplifiers and transceivers portfolio. Moreover, growing clout of advanced applications utilized in medical procedures is a positive. Also, momentum in higher power products in core materials processing space and solid bookings growth in China bode well. Synergies from Genesis buyout are likely to boost system sales revenues for this Oxford, MA-based company.
Markedly, IPG Photonics is regarded as the pioneer and leader of the fiber lasers technology market. The company has a dominant position in the core material processing market on the back of its expertise in handling fiber lasers, which are more reliable, efficient, robust, compact and easier to operate than conventional lasers. Improvements in their output power levels and cost as well as superior performance and lower cost of ownership have been driving the adoption of fiber-lasers. Moreover, IPG Photonics' vertically-integrated business model is a key differentiator in our view. Further, acquisitions have helped the company expand its product portfolio.
The consensus estimate for IPG Photonics’ current-year earnings has stayed at $3.22 per share over the past month. Shares have returned 12.4% year to date.
Price & Consensus: IPGP
Lumentum Holdings: Based in Milpitas, CA, this Zacks Rank #3 company offers optical and photonic products. The stock has rallied 23.2% in the past year.
Lumentum is well-poised to benefit from the growing need for bandwidth and scalable datacenters. Expanding bandwidth requirement and flexibility of communications networks are major growth drivers. Further, the company’s solutions enable computer vision biometric security, AR/VR, LiDAR and computational photography.
The consensus mark for fiscal 2021 earnings has moved 1.5% south to $5.79 per share over the past 30 days.
Price & Consensus: LITE