With analysts expecting IPG Photonics Corporation (NASDAQ:IPGP) to produce noticeable earnings growth of 16.73% annualised over the next few years, let’s stop and consider this strong vision. It is crucial for investors to do this, so they can judge the underlying components responsible for causing this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, this article will interpret IPG Photonics’s margin performance to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.
Understanding IPGP’s earnings with profit margin
At a high level, a company’s ability to earn on their sales efforts can play an important role in determining shareholder value. IPGP’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for IPGP
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$379.00m ÷ US$1.48b = 25.56%
There has been a flat movement in IPG Photonics’s margin over the past five years, as a result of 17.75% in average net income growth, keeping pace with average revenue growth of 16.98% indicating that that the previous revenue growth has been accompanied by a stable portion being translated in to net income. IPGP’s most recent margin of 25.56% appears to follow this trend, which suggests that the increase in net income has likely occurred from a combination of top line growth and enhanced cost efficiency.
How is IPG Photonics’s margin expected to behave in the future and what could it mean for shareholders?
Margins are expected to remain somewhat stable, with an expectation of 17.32% in annual revenue growth and a forecasted 16.73% in annual net income growth. This suggests future earnings growth is driven further by sound cost management alongside revenue increases, which is maintaining the incremental amount of net income that is retained from the forecasted revenue growth. However, investors should realise a stagnating margin can mean different things for different companies, thus more detailed research is essential. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. For IPG Photonics in particular, it is expected that profit margins will remain stable whilst the margins in the Electronic industry expand, whilst at the same time, the forecasted ROE of IPG Photonics is greater than the industry at 20.70% and 10.81% respectively, although it must not be forgotten than this result is influenced by the company’s debt levels. This suggests that analysts expect IPG Photonics’s return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on IPG Photonics’s future earnings whilst keeping a watchful eye over their ability to maintain cost efficiency and top line growth as these are the factors driving future earnings growth according to our preliminary margin analysis.
For IPGP, there are three key aspects you should further research:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is IPGP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether IPGP is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of IPGP? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.