LITE - Coherent's Stock Looks Deeply Discounted

2023-04-12 17:21:37 ET

Summary

• Coherent's stock has struggled to gain any footing over the past year, down around 50% despite completing their merger with IIVI.
• The company has continued to grow revenue and earnings despite this price pullback and now trades deeply discounted to peers and their own historical averages.
• We see 60%+ upside in Coherent stock over the next 2 years, with softening macroeconomic conditions on the horizon.

Combined Coherent-IIVI Business Not Getting The Credit It Deserves

Coherent Corp. ( COHR ) is a leading manufacturer of laser-based technologies used in a variety of industries including semiconductors, electronics, and healthcare. Investing in Coherent Corp.'s stock can provide investors with the opportunity to profit from the growing demand for laser-based technologies in manufacturing, automation and more, leading to the company's continued success. Coherent Corp. has recently completed its merger with IIVI , another leading manufacturer of laser-based technologies, basically doubling the breadth of their scope. The merger creates a larger and more diversified company with a broader range of products and services all under one roof (Figure 1). This development is a positive indicator of the company's future success and provides investors with additional reasons to consider investing in Coherent Corp.'s stock, although the stock has only trended downwards since completion. Coherent is down ~50% over the last year just off of 52-week lows despite delivering consistent earnings .

Figure 1. Coherent offers a number of product offerings, all within high-growth areas such as EVs & semiconductors

Trading at a roughly 35-55% discount to peers , we believe COHR could nearly double and still be valued relatively fairly to competition. Therefore, taking a conservative timeline and the lower end of these price targets, Coherent could very well reach the high $56-$59 range within the next 1.5-2 years if macroeconomic conditions improve. Keys to success include maintaining their current high growth levels, continuing to deliver on earnings, and paying down their debt load.

Relative Valuation

Coherent Corp.'s stock is currently trading at a relatively low price-to-earnings (P/E) ratio compared to its industry peers, at just 8.8x earnings, and 9.2x forward earnings. This suggests that the stock is undervalued and may provide investors with a good opportunity to buy in at a lower price before the market recognizes the company's true value. Additionally, the company has a strong balance sheet with a healthy cash position (~$1 Billion), which provides the company with the flexibility to invest in growth opportunities or return value to shareholders through share buybacks, debt repayment, or dividends. Looking at growth in relation to valuation we see that COHR, much in thanks to the merger with IIVI has been and is expected to be the fastest grower among peers despite trading at the lowest valuation indicating the market sentiment towards the stock may be lagging (Figure 2).

Figure 2. COHR trades at a discount despite posting strong revenue and earnings growth, which is expected to continue for the foreseeable future

Trading well below (~40-60%) the information technology sector average for just about every valuation metric and well below their own 5-year valuation averages, Coherent looks to be at a terrific entry price. All it will take is for them to pay down some of their debt to improve the enterprise value over the next year or so as well as more favorable macroeconomic conditions to shift investors back towards technology stocks and COHR could bounce back closer to 52-week highs. We give the stock 60-75% upside over the next 2 years and recommend it as a buy anywhere below the $40 mark.

Investment Risks

As we always state, with any investment, there are always risks to consider. One of the main risks with investing in Coherent Corp. is the high long-term debt and the potential for this to incur higher rates in current environments if COHR is unable to pay them off and refinancing is needed. Additionally, the company operates in a highly competitive industry and there is a risk that new technologies could emerge that render Coherent Corp.'s products relatively obsolete. Furthermore, the merger with IIVI brings higher diversification, which is a pro in bearish markets, but could inhibit growth long term, reducing potential gains in bull markets. Investors should carefully consider these risks before investing in Coherent Corp.'s stock. There appears to be a relatively strong level of support around the low $30 range, meaning downside risk is likely around 12-16% at current prices.

Overall Conclusion

Despite these aforementioned risks, investing in Coherent Corp.'s stock can still provide investors with the opportunity to profit from the growing demand for laser-based technologies and the company's continued success. We see an approximately 6:1 reward to risk ratio over the next two years in Coherent at current prices. With its strong balance sheet and the potential for the merger with IIVI to create a larger and more diversified company, Coherent Corp. is well-positioned to continue its success and provide investors with returns on their investment in the strong and ever-growing semiconductor market. In conclusion, as always, investors should carefully consider both the risks and opportunities before making any investment decisions, but we believe investing in Coherent Corp.'s stock can provide investors with a valuable opportunity to profit from the growth of the laser-based technology market (Figure 3).

Figure 3. Coherent is a leader in the laser market, offering better technology than competitors for competitive prices

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