With increasing global dependence on technology, the tech infrastructure space is gaining great prominence. A case in point is II-VI Incorporated (IIVI), an engineered material and optoelectronic components and device developer and manufacturer. The company is benefiting from its diversified product portfolio and end market applications.
On February 12, IIVI became the third suitor within a month to enter a bidding war to acquire industrial laser specialist, Coherent Inc. (COHR). IIVI offered $260 per share, valuing COHR at $6.4 billion. Following the announcement, IIVI shares retreated 9.7% intraday to close the day’s trading session at $89.92. The stock had hit its 52-week high of $100.44 in the preceding session.
In January, COHR agreed to be acquired by Lumentum Holdings (LITE) in a cash-and-stock deal valuing the company at roughly $226 per share. However, in February, the company received an unsolicited cash-and-stock offer from MKS Instruments (MKSI) to be acquired at roughly $240 per share. So, IIVI’s proposal represents a 24% and 9.8% premium, respectively, to the bids by LITEs and MKSI.
Let’s take a closer look at the factors that could influence IIVI’s performance in the near term:
Inorganic Growth Strategy
Under the terms of IIVI’s proposal, COHR’s shareholders would receive $130 in cash and 1.3055 IIVI common shares for each COHR share. The combination with COHR would establish IIVI as a global leader in photonic solutions, compound semiconductors, and laser technology and systems. The company expects to achieve estimated, combined run-rate synergies of $200 million annually within 36 months. Hefty Product Pipeline
IIVI has introduced six new products so far in February alone. Earlier this week, IIVI introduced its ceramic YAG (yttrium aluminum garnet) platform for solid-state lasers and optical components because the growing adoption of advanced driver-assistance systems (ADAS) in next-generation vehicles is spurring the development of LiDAR systems. Furthermore, the rapidly growing number of photonics-based instruments for life sciences, including fluorescence-based imaging systems, flow cytometers, and DNA sequencers, is driving the demand for multi-functional laser product platforms. As such, IIVI recently introduced its multi-wavelength laser module product line for life sciences.
Solid Financial Performance
In its fiscal second quarter, ended December 31, 2020, IIVI reported a record revenue of $786.6 million, increasing 18% year-over-year. The company continues to gain market share in 3D sensing, growing its revenue by more than over 200% versus last year and more than 140% sequentially. IIVI’s book to bill ratio was 1.17 for the quarter and 1.12 on a rolling twelve-month basis. As a result, the company delivered a record backlog of $1.08 billion. Its adjusted EPS came in at $1.08, surging 28.6% compared to the year-ago value of $0.84.
Favorable Analyst Sentiment
Analysts expect IIVI’s current year revenue and EPS to increase 29.7% and 30.5%, respectively. The company’s EPS is expected to grow at a rate of 24.4% per annum over the next five years.
Of the 17 Wall Street analysts that rated the stock, 12 have given it either a Strong Buy or a Buy rating. Analysts expect the stock to hit $107.12 in the near term, which represents a potential upside of nearly 20%.
POWR Ratings Show Odds are in Favor
IIVI has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system evaluates each stock based on total eight different categories. Among these categories, IIVI has a Growth Grade of B. Over the past three years, the company has grown its revenue and EPS at CAGRs of 39.6% and 10.8%, respectively.
Moreover, IIVI has a Quality Grade of B, consistent with the company’s robust fundamentals and stable financials. In the B-rated Technology - Communication/Networking industry, IIVI is ranked #14 of 40 stocks.
Beyond what we stated above, we also have given IIVI grades for Value, Momentum, Stability and Sentiment. Get all the IIVI ratings here.
Bottom Line
IIVI has substantially less product overlap with COHR than competing bidders LITE and MKSI. So, there is higher likelihood bid for COHR will succeed with potentially less impact to the combined value. However, if COHR rejects LITE’s offer, it will owe the company a $217.6 million penalty for walking away from the agreed-upon deal. COHR is still evaluating all the three offers, so some deal risk persists.
IIVI has made a series of acquisitions over the last couple of years, including Sweden’s advanced SiC epi material producer Ascatron, ion implantation foundry service provider Innovion Corporation, and optical communication components manufacturer Finisar. But in addition to these consistent inorganic growth strategies, investors should acknowledge IIVI’s diversified and broad product portfolio.
Strong results in the past two quarters reflects IIVI’s expansion and its capture of greater market share in all end markets. The company has significantly increased its volume shipments into multiple end customers and applications, giving it ample space for organic growth. Hence, we believe, IIVI is well-positioned to capitalize on the mega trends such as autonomous electric vehicles, genomics, 5G and cloud computing to deliver sustainable long-term growth.
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IIVI shares were trading at $86.57 per share on Thursday morning, down $2.74 (-3.06%). Year-to-date, IIVI has gained 13.97%, versus a 3.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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