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

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Trading Center