Rofin-Sinar Technologies (Nasdaq:RSTI) has often been a quality small cap company that, despite a lack of institutional support (big-name sell side coverage), has often traded at pretty robust premiums. With key industrial markets in Germany and China struggling, though, these shares have had a rough go of it and have come down in value substantially. While investors should not ignore the downside of further global economic stagnation, now may be a good time to get up to speed on a stock that should be highly leveraged to a recovery in those markets.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Another Tough Quarter
Rofin-Sinar has been in the doldrums for a little while now, and this fiscal second quarter was little better. Revenue fell 5%, as declines in the core macro and micro laser categories (down 9 and 6%, respectively) neutralized the 13% growth in components (13%).

Rofin-Sinar's revenue has also fallen to that point where the company is seeing meaningful negative operating leverage. Gross margin dropped two and a half points, while operating income dropped 37%.

SEE: Understanding The Income Statement

Familiar Problems Hitting the Company
Investors who've been watching first quarter earnings reports have heard familiar themes. Companies like ABB (NYSE:ABB) and MAN SE have lamented the weak state of the European economy, while a host of companies like Caterpillar (NYSE:CAT) and Emerson (NYSE:EMR) have said much the same about China as well. In all cases, though, these companies have pointed to strong underlying demand in North America.

That's problematic for Rofin-Sinar, as only about 20% of revenue comes from North America. North American sales were up 12%, but Europe (46% of sales) was down 13% and Asia (about one-third of sales) was down 3%.

About 30% of this company's revenue comes from the machine tool industry, and that sector has been under pressure in both Germany and China (as investors can see in the results of machine tool maker Hardinge (Nasdaq:HDNG). Automobile manufacturers in Germany are likewise seeing some pressure, and the company has yet to see a big recovery in spending from the semiconductor and electronics industries.

Business Will Come Back ... Eventually
As quite a lot of Rofin-Sinar's product line carries six-figure price tags, it's not surprising that their sales would be economically sensitive. Eventually, though, these markets will recover and demand will pick up. Moreover, as China adopts more and more automation, industrial laser demand should continue to increase.

It's also worth noting that Rofin-Sinar does not seem to be losing appreciable share. Although the company is behind IPG Photonics (Nasdaq:IPGP) in fiber lasers, this is still an emerging market. In fact, Rofin-Sinar is really the only diversified company among the publicly-traded laser names. Coherent (Nasdaq:COHR) has about three-quarters of Rofin's 20% market share, but is focused largely in microlectronics. IPG Photonics has a fairly narrow focus on fiber lasers, and Newport (Nasdaq:NEWP) is strong primarily in research and science, whereas Rofin-Sinar serves nearly 100% of the industrial laser market.

SEE: Earning Forecasts: A Primer

The Bottom Line
It certainly is apparent that Lincoln Electric (Nasdaq:LECO) is the stronger industrial welding name today, with strong revenue growth across the board and a pretty hefty valuation. Rofin-Sinar is weaker and cheaper. So momentum investors will likely do better with the former, while value investors probably want to check out the latter.

The good news about Rofin-Sinar is that the stock looks pretty cheap on a long-term basis. There's no reason to expect any fast turnaround, but investors may want to keep an eye on this with an eye towards buying in once the business stabilizes.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  3. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  4. Entrepreneurship

    Top 10 Side Jobs You Could Start Now

    Ways to make extra cash in your spare time.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!