Trade Uncertainty And Solar Delays May Pressure Laser Systems Before Longer-Term Recovery Arrives

Catalysts

About LPKF Laser & Electronics

LPKF Laser & Electronics develops and supplies laser based systems for advanced electronics manufacturing, thin film solar applications, and precision plastic welding.

What are the underlying business or industry changes driving this perspective?

• Although LPKF is well positioned as a key equipment supplier in advanced semiconductor packaging, ongoing tariff and trade uncertainty could delay high volume LIDE ramp ups in Korea and the U.S., pushing out the timing of larger system orders and constraining near term revenue growth.
• While the shift from mechanical to laser based depaneling in electronics remains intact, customers postponed CapEx decisions in Q2 due to limited planning visibility, which may prolong a period of subdued order intake and limit operating leverage on fixed costs and EBIT margins.
• Although LPKF holds a strong technological foothold in emerging display and foldable device applications, weaker consumer electronics demand and potential export restrictions could slow capacity expansions at panel makers and cap the contribution of this segment to earnings over the next few years.
• Despite the disruptive potential of perovskite thin film solar and LPKF’s early positions in China and the U.S., the lack of concrete high volume factory investments, particularly in China, raises the risk that solar related laser system revenues remain lumpy and hinder stable margin progression.
• While recent cost programs and the planned North Star initiative demonstrate a path toward double digit EBIT, limited visibility on large project downpayments and possible further weakness in automotive and other cyclical end markets may keep free cash flow and net margins volatile during the transition period.

Assumptions

This narrative explores a more pessimistic perspective on LPKF Laser & Electronics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming LPKF Laser & Electronics's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.7% today to 16.0% in 3 years time.
• The bearish analysts expect earnings to reach €26.6 million (and earnings per share of €1.07) by about December 2028, up from €-1.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €59.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, up from -135.3x today. This future PE is lower than the current PE for the GB Electronic industry at 40.2x.
• The bearish analysts expect the number of shares outstanding to decline by 4.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent global tariff and trade uncertainty could keep customers from triggering already planned CapEx, delaying high volume LIDE ramp ups in Korea and the U.S. and resulting in weaker than expected order intake and revenue growth.
• Thin film solar and perovskite applications may remain stuck in an extended evaluation phase, with limited high volume factory investments in China and only niche projects globally. This would leave the Solar business unit facing lumpy demand and pressure on segment earnings and overall EBIT margins.
• Despite secular adoption of laser based depaneling and welding, structurally weak end markets such as automotive and funding constrained segments such as U.S. research institutions for ARRALYZE could offset growth in consumer and medical. This could lead to slower consolidated top line expansion and constrained net margin improvement over time.
• If the competitive improvement and North Star programs fail to sufficiently reduce fixed costs or are offset by lower order inflow and missing downpayments, LPKF may remain overly sensitive to quarterly revenue swings. This would limit the ability to reach and sustain double digit EBIT and stable free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for LPKF Laser & Electronics is €10.0, which represents up to two standard deviations below the consensus price target of €11.0. This valuation is based on what can be assumed as the expectations of LPKF Laser & Electronics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €13.0, and the most bearish reporting a price target of just €10.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €166.3 million, earnings will come to €26.6 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €5.59, the analyst price target of €10.0 is 44.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.