A Member of Pat McKeough’s Inner Circle recently asked for his advice on alaser and fibre-optics maker now selling to a variety of industries.
Pat notes the company has recently grown through acquisitions, which includes two key purchases in the last two years. Increased demand across all of its product lines continues to fuel revenue and earnings growth. Still, says Pat, the company remains vulnerable to a global economic downturn.
Q: Pat, would you take a look at II–VI? It seems like a good tech stock. Thanks.
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II-VI Incorporated (symbol IIVI (pronounced “two-six”) on Nasdaq; www.ii-vi.com), is a global leader in the development, manufacture, and marketing of a wide variety of laser, photonic, infrared, and fibre-optic products and materials. These are used in the communications, military, consumer electronics, semiconductor, life sciences, and automotive industries.
The company is headquartered in Saxonburg, Pennsylvania, and has research and development, manufacturing, sales, service, and distribution facilities worldwide.
To remain at the leading edge of its industry, II-VI invests in its own research, but also in firms with technology and products that it can use to either enhance or expand its existing business.
For example, in June 2017, the company paid $45 million for Integrated Photonics, a manufacturer of magneto-optic materials used in fibre optics; and in November 2018, it agreed to acquire Finisar, a manufacturer of optical communication components, in a $3.2 billion deal. These acquisitions will make II-VI one of the world’s largest companies specializing in photonics, the branch of technology concerned with the properties and transmission of photons (light which can contain data) in fibre optics and lasers.
The acquisition of Finisar will also put II-VI at the forefront of vertical-cavity surface-emitting laser (VCSEL) technology. VCSEL depth cameras capture highly accurate 3D digital information and are used in facial recognition applications and in 3D mapping. Demand for this technology is expected to grow rapidly over the next few years, particularly in handheld devices and in autonomous vehicles.
In September 2018, the company paid $85 million for CoAdna, a global leader in wavelength selective switches, with its own exclusive liquid crystal technology. These products will complement II-VI’s portfolio of fibre optic communications products and will help the company meet the growing demand for data transmission infrastructure.
In addition to these acquisitions, II-VI increased its spending on research from $51.3 million in 2015 (6.9% of total revenue) to $117.2 million in 2018 (10.1% of total revenue).
Over the past five years, overall revenue has increased 69.8%, from $683.2 million in 2014 to $1.16 billion in 2018. Earnings have increased 64.2%, from $53.6 million ($0.84 a share) to $88.0 million ($1.49 a share).
In the latest quarter ended March 31, 2019, revenue jumped 16.2%, to $342.4 million from $294.7 million, a year earlier. That reflects increased demand across the company’s full product line. Excluding one-time items, earnings rose 31.8%, to $40.6 million, or $0.62 a share, from $30.8 million, or $0.46.
On March 31, 2019, II-VI held cash of $221.2 million. Its long-term debt of $484.8 million is a low 19.0% of its market cap.
The company’s acquisition of Finisar gives it a dominant position in 3D mapping technology, an industry with big growth potential. As well, the company’s silicon carbide (SiC) semiconductor technology should be in high demand from electric-vehicle (EV) makers. The technology helps automakers increase the number of kilometres that their EVs can travel between charges. What’s more, II-VI’s optical communication equipment will also be in high demand as 5G data transmission is rolled out.
Still, a global economic downturn would slow demand and development of the consumer products that rely on II-VI’s technology. As well, the company’s growth through acquisition adds risk.
The stock trades at just 15.4 times the 2019 forecast earnings per share of $2.62.
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