Coverage of the shares of this optoelectronics maker were recently initiated at Cowen & Co. with an ‘Outperform’ rating. Wall Street is forecasting annual growth of 30.8% over the next five years for the company.
II-VI (IIVI)
From The Cutting Edge
II-VI (IIVI) Incorporated is a Pennsylvania-based optoelectronics maker with a core competency in engineered materials. The company’s name reads aloud as “Two Six”, referencing groups II and VI of the Periodic Table of Elements.
By chemically combining elements from these groups, II-VI produces what are known as infrared optical crystalline compounds. Those compounds are Cadmium Telluride (CdTe), Zinc Selenide (ZnSe), Zinc Sulfide (ZnS) and Zinc Sulfide MultiSpectral (ZnS MS).
These compounds are commonly referred to in the industry as “Two Six Materials”. It’s not important to remember the names. All you really need to know is that these materials are critical for directing and focusing lasers in a variety of technical applications.
II-VI operates a number of business units falling under three categories which include Laser Solutions, Photonics, and Performance Products. Those units are split quite nicely, with a 35%, 43% and 22% revenue share respectively.
Top served markets currently include optical communications, industrial, and military, which account for 44%, 30%, and 11% of revenue share respectively. The company is also internationally diversified, with 45% of its business in North America, 21% in Europe, and 19% in China.
II-VI has earned the status of world leader in CO2 laser optics and delivers the largest vertically integrated CO2 laser optics manufacturing process in the world. That makes the company a powerhouse in industrial cutting and welding, medical soft-tissue surgery, and a variety of scientific applications.
II-VI, however, is not to be pigeonholed to these industries. The company recently earned itself a crucial spot in Apple’s iPhone X for its 3D sensing array and is expected to penetrate the entirety of Apple’s upcoming iPhone lineup, to be announced later this year. To be more specific, II-VI is a key partner in Apple’s intention to put VSCELs in all of its mobile devices for augmented reality applications.
This is our primary bull case for II-VI in the near to mid-term, but it isn’t the only factor contributing to growth.
II-VI is also aiming to penetrate the robotics and self-driving car markets, In January, it introduced a new mirror for lidar applications, the primary 3D mapping method for driverless vehicles being deployed by Google’s Waymo, Ford, Uber, and the like. The new mirror was designed to be a key differentiator, by enabling cheaper and smaller design of computer vision components.
We expect II-VI to be a key player in lidar as the field develops.
Other growth catalysts for II-VI include electric vehicles and 5G, both of which require Silicon Carbide substrates made by the company for high power or high frequency electronics. II-VI even provides the components for the F-35’s Electro-Optical Targeting System (EOTS), a further testament to the high quality of the company’s materials and components.
II-VI is currently sitting at 20.3% revenue growth trailing twelve months. The company has a robust profit margin of 10.2% with $93 million in net income over the last year. Cash position is strong at $263 million and the company’s debt is more than manageable at $450 million. Assets of $1.7 billion outweigh liabilities of $722 million by more than double.
There’s a decent premium here at a P/E of 27.3 and P/S of 2.3 but nothing too far out of the norm.
II-VI is currently covered by 10 institutional analysts, with six Buy ratings, two outperform ratings, and two Holds. The average price target is $50.90, representing a 20% upside from today’s share price. We rate II-VI Inc. a Buy under $44.00 a share. The Risk Level is ‘Medium’.
Jason Stutman, The Cutting Edge, www.angelpub.com, 877-303-4529, July 31, 2018