Rofin-Sinar Down On Power

By Stephen D. Simpson, CFA | May 08, 2012 AAA

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.

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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

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

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