Why Coherent Stock Is A Buy Despite Rising Nearly 20% (NYSE:COHR)
Last year in June, when Coherent’s (NYSE:COHR) share price nearly doubled, skeptical investors could dismiss the noise. I rated COHR stock a sell at the time. After that, the company issued a weak outlook. Fast-forward to Feb. 6, 2024, when shares rose by over 17% after the firm posted stellar Q2 results. Shareholders also liked Coherent’s Q3/2024 guidance that exceeded consensus estimates.
What should investors do after Coherent’s post-earnings rally?
Coherent Q2 2024 Results
Coherent earned 36 cents a share on a non-GAAP measure, even though its revenue fell by 17.5% Y/Y to $1.13 billion. Readers are encouraged to look at the reconciliation of GAAP figures first. In the quarter that ended Dec. 31, 2023, (1) amortization of acquired intangibles and (2) integration and sign consolidation were the biggest contributors to the adjustments, as highlighted below.
Coherent’s share-based compensation is significant but not a concern.
The provider of lasers and photonics solutions exceeded non-GAAP EPS by improving its gross and operating margins sequentially. Chief Executive Officer Chuck Mattera said on its conference call that the firm achieved enhanced operating efficiency in nearly all of its businesses. However, it is far from done. It will continue to optimize its production footprint while finding synergies integrating the legacy Coherent business.
Stock markets reacted bullishly to the incredible 100% sequential increase in 800G transceiver shipments at a quarterly run rate of $100 million. Chief Marketing Officer Sanjai Parthasarathi attributed the over 50% in Datacom transceiver revenue from AI-related applications.
Markets are looking ahead, expecting production to ramp up and market growth to continue. Coherent is ahead of the sector on revenue, EBITDA, and EBIT growth. It scores a B or higher in those line items on the Seeking Alpha Quant score:
Its weak return on equity growth (forward) and EPS diluted growth grades are both D, dragging its overall grade to a C-.
The stock score increases in all factor grades. Most notable are the valuation and profitability grades:
Coherent has growth prospects in the silicon carbide and MicroLED markets. In the former, the firm announced transactions with Mitsubishi Electric and DENSO on their aggregate investments of $1 billion in Coherent’s silicon carbide business. It entered long-term supply agreements for epitaxial wafers and carbide substrates. The cash flow generation from such growth allowed the firm to increase its planned debt repayment for this fiscal year. CEO Mattera said on the call that this resulted from Silicon Carbide LLC being able to find its own operating and capital expenditures.
The company received multiple MicroLED-related orders from China, Taiwan, and Korea. Customer engagement is increasing as the laser-induced forward transfer shifts from the current 10-micron and moves towards 5-micron MicroLEDs.
To ramp up production of 800G and 1.6T transceivers, Coherent needs VCSEL supply. Fortunately, the firm owns two facilities, enabling the firm to produce Datacom. This integration gives it an advantage over its competition. In addition, the firm has a better view of meeting demand as it monitors both internal and external supplies. By shipping based on demand levels, Coherent may manage its inventory and costs most effectively.
Coherent’s valuation is the greatest risk after shares rallied. Markets potentially assigned a high premium, betting that the company will realize revenue growth from AI growth in the short term. Still, the company highlighted the megatrends in AR/VR, wearables, increased SiC electronics content in EVs, and LiDAR. Demand for products like VCSELs and edge-emitting lasers will increase as a result.
Investors may apply an enterprise value to EBITDA multiples model (EV/EBITDA Multiples) to estimate Coherent’s fair value. This model applies a 12.2x multiple, based on IPG Photonics (IPGP), LightPath (LPTH), IDEX (IEX), Novanta (NOVT), and Electro-Sensors (ELSE) as the comparable firms.
The downside fair value is $43.09, 11.9% below the closing price.
In a discounted cash flow analysis provided from Stock Rover Research, Coherent’s margin of safety of -12% implies a fair value of $51.26.
Coherent is trading at well over $50, levels not seen since last June. This time, its SA Quant momentum grade rose from B+ six months ago to an A-.
With bullish market conditions and positive sentiment, chances are better that the stock will not fall to the downside fair value prices presented in this article. The company operates in many growth segments that will lift its business momentum. Coherent demonstrated that it could achieve higher efficiency. It will continue to cut costs to increase operating margins throughout 2024.