Vedvati Shrotre Terry Kwan Saikrishna Poddutur Vishal Shah Presented April 30, 2015.

Vedvati Shrotre Terry Kwan Saikrishna Poddutur Vishal Shah

Presented April 30, 2015

Agenda

IntroductionCompany OverviewMacroeconomic OverviewFinancial AnalysisTechnical AnalysisFinancial ProjectionsValuationRecommendation

Introduction

Ticker: IPGPP/E: 24.40Current Price: $92.49Industry: Semiconductor Equipment &

MaterialsMarket Capitalization: 4.85BEnterprise Value: 4.58BPEG ratio: 0.82Float: 44.04M

Introduction

Leading developer and manufacturer of a breadline of high performance fiber lasers, fiber amplifiers and diode lasers used in material processing.

Began operations in 1990 and incorporated in Delaware in 1998. Headquartered in Oxford, Massachusetts.

Fiber lasers, unlike gas (C02) lasers or crystal lasers use semiconductor diodes as the light source to pump specialty optical fibers. The fibers have the diameter comparable to human hair.

Fiber lasers advantages : superior performance, lower cost, ease of use, compact size, wavelength and precision control.

Company Overview

Company Overview – Business Model

Manufacturing

• Vertically integrated operations

• In house engineering capability to integrate products

Research and Development

• Extensive emphasis on R&D in laser materials, fiber, optoelectronic components

• 170 patents issued and 260 patent pending applications

Sales

• Sell products globally to OEMs, system integrators and end users.

• Efforts to design and introduce new and improved products.

Global Footprint

United States and

North America;

14.7%

Europe ; 10.1%

Germany and

Eastern Europe; 22.5%

Japan; 9.4%

China; 31.9%

Other; 11.4%

Major Manufacturing facilities: United States, Germany and Russia

Sales and Service Offices: China, France, India, Italy, Japan, Poland, Singapore, South Korea, Spain and Turkey

Material Processing application centers: US, Germany, Russia, China, Japan, Italy and South Korea

Product Segments

Cutting & Welding Marking and Engraving Micro –Processing and Fine

processing 3D Printing

Material Processing

Special Projects and Research Direct energy demonstration Obstacle warnings

Advanced Applications

Broadband – fiber, call video signal transport

Metro and long haul wire line

Communications

Skin rejuvenation and wrinkle removal.

General Surgery and urology Dental

Medical

Materials Process-ing - 95%

Advance Ap-plications -

3.3%

Communi-cations -

1.1%

Medical - 0.6%

Material Processing - Customer Segmentation

Materials processing

Aerospace

Automotive

Consumer

Heavy industries

Semiconductors

General Manufactur

ing

Welding titanium air frames

High-strength steel cutting and welding

 Electronics and credit card marking

Hardening and welding pipes in nuclear, wind turbine and pipeline industries

Photovoltaic manufacturing

Marking, engraving and printing

Welding, brazing and hardening

Management Overview

Dr. Valentin P. Gapontsev is the founder and CEO, he is also the managing director of IP Fiber Devices UK Ltd

IPG was founded by him in 1990 in Russia

PhD in Physics

Continued

Mr. Timothy V P Mammen is the CFO since July 2000.

He also serves as a Senior Vice President since February 2013.

Mr. Mammen was Finance Director and General Manager of United Partners Plc, from 1995 to 1999 and prior to that he worked in the finance department of E.I. du Pont de Nemours and Company.

Macroeconomic Overview

Applications of Laser Products

Communication and materials processing segments are the largest in the laser industry

3D laser printing is currently the smallest segment but is rising quick. Its revenue increased 30% in 2014

Industrial Laser Revenues

C02 Lasers make up about 34% of industrial laser’s revenue in 2014

Fiber Laser makes up about 36% of industrial laser’s revenue in 2014

Fiber Laser in industrial laser grew 14% in 2014 and is expected to continue in the coming years

Market Trends

Industrial laser systems account for 14% of global machine tool sales

Revenue growth of 7.93% from 2013-2014

Strong growth is expected to continue due to strong demand for excimer lasers and supplies, essential for manufacturing semiconductors

Material Processing Communication

Revenue grew 3.56% from 2013 to 2014 and is expected to grow at 2.8% per year

Communication segment growth is predicted to slow down slightly in 2015 but will remain strong

Optical Storage Segment growth is expected to be stagnant or negative due to the growing popularity in solid state drive

Automotive Trend

Global vehicle production is forecasted to increase steadily at around 4.8% from 2015-2017

From: Statista

Vertically integrated development and manufacturing

Strong research bringing breath and depth of expertise

Diverse customer base reflecting the diverse applications of lasers

SWOT Analysis

S Litigation expenses due to infringement of intellectual property rights

High level of fixed costs and inventory levels

Limited suppliers

W

Huge opportunity to displace traditional lasers in several applications

Enable use of fiber lasers in new applications

Can expand product portfolio and global to reach

O Markets are competitive characterized by rapidly changing technology

Manufacturing capacity and operations may not be appropriate for future levels of demand

Currency rate risk

T

Porters Five Forces

Single of limited source suppliers for many of the key components and raw materials.

Suppliers might also be key competitors.

Supplier Power – High

Largest customer generates 11% and top 5 generate 20% in revenue.

Diverse range of customers.

Buyer Power – Low

Competed with conventional laser technology and amplifier products

Also compete with non-laser production methods such as water jet cutting etc

Threat of substitution – Moderate to High

Significant price and technology competition within the industry.

They are bigger players like Rofin-Sinar Technologies, Trumpf GmbH etc.

Competitive Rivalry – High

Being a manufacturing and research intensive business it is not easy for new entrants.

Domain expertise is an essential part.

Threat of new Entry – Low to Moderate

Financial & Technical Analysis

Financial Analysis

2010 2011 2012 2013 20140.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

DIO DSODPO Cash Conversion Cycle

2010 2011 2012 2013 20140.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Gross Margin Operating profit marginEBITDA margin Net profit margin

Steady profit margins Slight decrease in 2013, due to increased costs as a result of a small acquisition

Profit Margins

High and steady conversion cycle of around 128 days

Conversion cycle

Financial Analysis

Efficiency Ratios and DuPont Analysis

Financial Analysis

2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%

60%

Greenblatt ratio 1 (EBIT/Tangible Assets) Greenblatt ratio 2 (EBIT/EV)

Financial leverage 2010 2011 2012 2013 2014

Long-term debt to asset 3.5% 2.6% 1.6% 1.1% 1.6%

Long-term debt to equity 4.6% 3.2% 1.9% 1.2% 1.9%

Financial Analysis

Profitability IPGP Industry Peers

Gross Margin 54.1% 42.4%

Operating profit margin 36.9% 13.8%

EBITDA margin 41.5% 18.0%

Net profit margin 26.0% 7.9%

Return on asset 16.2% 4.4%

Return on equity 20.3% 4.6%

Liquidity

Current ratio 7.32 4.75

Quick Ratio 5.92 2.16

Activity

Total asset turnover 0.68 0.73

Fixed asset turnover 2.82 5.83

Cash Conversion Cycle

DIO 81.48 147.75

DSO 58.53 85.95

DPO 18.56 34.21

Cash Conversion Cycle 121.46 198.93

Financial leverage

Long-term debt to asset 1.6% 14%

Long-term debt to equity 1.9% 20%

Growth 1 year

Quarterly Revenue Trends

Technical Analysis

Financial Projections & Valuation

Comparables

Comparables

Income Statement Projections

WACC Calculation

DCF Valuation

Recommendation

Recommendation

We recommend to put the stock in WATCHLIST because:

Strong fundamentals Stable high growth rate Better margins and returns compared to peers Considerable market share But, Highly overvalued based on intrinsic value Technical analysis does not support