The crisis in Ukraine caused by the Russian invasion, which led to higher oil and gas prices, has negatively impacted the technology sector, as evidenced by its poor performance year-to-date.
Once headwinds from the war in Ukraine pass, tech stocks should be back in an uptrend, fueled by the expected resolution of several other issues such as semiconductor supply disruptions, high input costs, and labor supply/demand imbalances.
II-VI Incorporated (IIVI) belongs to a group of well-positioned stocks which have a higher probability of significant upside. A solid financial position, a profitable operation, and a rosy outlook for the global market in which the company operates define this potential.
Thus, I am bullish on this stock.
II-VI Inc. is a supplier of a variety of application-specific photonic and electronic materials and components to manufacturers in diverse industries such as communications, industrial, aerospace and defense.
The company also serves semiconductor capital equipment, life sciences, consumer electronics, and automotive markets. Its operations are worldwide. II-VI Incorporated is headquartered in Saxonburg, Pennsylvania.
Fiscal Q2 2022 Results (ended December 31, 2021)
Revenue rose nearly 3% year-over-year to $807 million in the second quarter of Fiscal 2022, driven by robust demand for the company’s products across all end markets. Despite the uptrend, total revenue fell $10.3 million short of analysts’ median forecast.
The income statement closed with earnings per share (adjusted basis) of $0.92, beating the median consensus estimate by $0.06.
Not to mention that the second quarter of Fiscal 2022 saw orders top $1.1 billion for the first time. This was a strong indication that II-VI Incorporated is now responding to the increased demand for the technologies it provides.
Financial Condition
As of December 31, 2021, $2.65 billion in cash was slightly more than the total debt of $2.47 billion. Nonetheless, the balance sheet rests on strong pillars, as the interest coverage ratio of 6.7 suggests easy payment of the interest cost on any outstanding debt.
Also, the current ratio of 2x indicates that the company generates sufficient funds to meet short-term commitments.
Currently, the total capital allocated to each investment costs more than what the allocation itself can yield, as the weighted average cost of capital of 8.4% is compared to a TTM ROIC of 5.4%.
The company must therefore continue to improve the profitability of its operational activities.
However, the increasing industrial adoption of lasers and optical components because of ongoing digital transformation is an encouraging sign for II-VI Inc. Shareholders can now hope that revenue will continue to grow, likely at more than 15% annual growth we’ve seen since 2019.
Also, if the company doesn’t let operating expenses rise too much, profit margins will improve, giving the stock price strong upside potential.
Market Outlook
According to Emergen Research, increasing awareness of II-VI Incorporated and competitors’ technologies across all industries is identified as a key catalyst driving the expansion of the global semiconductor laser market in the years to come.
The research shows that total sales are expected to grow at a 6.7% annual rate through 2028, potentially leading the global semiconductor laser market to reach $12.7 billion by 2028. The market size stood at $7.6 billion in 2020.
In addition to securing a record $1.7 billion backlog, the company is sure to contribute to global growth thanks to key megatrends emerging amid its pump laser power products for the industrial markets and its data center transceivers for the communication markets.
II-VI Fiscal Q3-2022 Forecast
For the third quarter of Fiscal 2022 (ending March 31, 2022), revenue should be between $785 million and $825 million, according to management, while adjusted earnings per diluted share should be between $0.75 and $0.90. The consensus for EPS is $0.86.
Wall Street’s Take
For the past three months, 15 Wall Street analysts have issued a 12-month price target for IIVI. The company has a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell rating.
The average II-VI (IIVI) price target is $82.38, implying a 28.4% upside potential.
Conclusion
So far this year, the stock is down more than 6% and is suffering from the same headwinds that are hitting the entire tech sector. It shouldn’t be hard for the stock price to recover quickly, as it has strong fundamentals.
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