Coherent Corp.
Moat: 1/5
Understandability: 3/5
Balance Sheet Health: 2/5
Coherent Corp. is a global leader in engineered materials, optoelectronic components and devices, and laser systems, serving a diverse array of industries including industrial, communications, electronics and life sciences, though its main business is selling its lasers to semiconductor manufacturers.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Business Overview
Coherent Corp, operates globally through three segments: Networking, Materials and Lasers.
Networking: This segment focuses on the design, manufacture, and sale of components that manage and control optical signals, mainly in high-speed data communications, and includes transceivers, modules, and line cards.
Materials: This segment produces and supplies engineered materials for a variety of applications. This includes optics, crystals, ceramics, and composites used in laser systems, high-speed networking, and the semiconductor and industrial markets.
Lasers: This segment offers a broad range of lasers, including CO2 lasers for industrial applications, UV lasers for materials processing, and high-power lasers for scientific research.
The business model is complex and reliant on a specific segment. Though these products cater to multiple industries, its reliance on the semiconductor industry might create more volatility and risk in its financials, as it is a cyclical business by nature.
Industry and Competitive Landscape
The industries in which Coherent Corp. operates are dynamic and competitive. They have a strong position in optical communications and advanced materials, but they have a limited presence in other areas. Optics & Laser Manufacturing: The industries are competitive, with a mix of established players and emerging companies. Price, performance, and technological innovation are important competitive factors. Communications: This market is characterized by rapid technological change and intense competition. Companies have to continually innovate to offer better transmission speed, and bandwidth while cutting costs. Material Manufacturing: Differentiation in this market is often based on the unique properties of the materials. This includes better quality and more consistent quality of the material, and the ability to offer it at lower prices than competitors.
Coherent is exposed to fluctuations in spending by its customers and competition from other providers and substitutes in the industry. It also faces competition from substitute goods and services from competing technologies.
Moat Rating: 1/5
Coherent’s current competitive landscape and financial position do not allow for the emergence of a considerable moat. The business has some degree of technological and scale advantages, but the lack of pricing power and sustainability over long period of time is concerning. It’s hard to see how Coherent can sustain high profits for long periods of time. That’s why this business has been assigned the lowest moat score.
Intangible Assets: They do have some patents on their products, but these are not strong enough to allow for long-term profitability. As we mentioned in the text above, patents and intellectual property are easy to challenge, especially for companies with wide moats. Switching Costs: It’s also not difficult to imagine a new company manufacturing similar products for lower prices and having enough power to entice Coherent’s customers into buying their products. This indicates low switching costs. Network Effects: There’s no clear evidence of the existence of network effects on this business. It’s hard to see how the use of their products creates benefits for other users of the same product. Cost Advantages: Although the management tries to cut costs by moving the manufacturing process to lower costs locations, these actions are usually replicated by competitors and so do not provide the sustainable competitive advantage over competitors.
Risks to the Moat
Technological Changes: Technology moves quickly in the semiconductor and communications sectors. So, the company may be unable to keep its technological advantages and may be displaced by new technology competitors. Customer Concentration Risk: The reliance on some key companies makes Coherent vulnerable. If these customers change suppliers or lower their demand for Coherent’s products, then it may have a great impact on its revenue and profits. Intense Competition: The company’s segments are all very competitive, and so they face constant pressure on prices which results in compressed margins and lost sales to competitors. This can also include over-bidding on new acquisitions in order to not lose to competitors. Economic Cycles: The semiconductor market is known for cyclicality, so slowdowns in this industry would lead to reduced profits and increased volatility in financial performance. The market is also subject to macroeconomic issues like inflation, interest rate changes and recessions. Acquisition Integration: Coherent has had massive acquisition activity and may continue to do so. Merging and integrating these businesses into a single company might prove to be difficult and may lead to lower profitability.
Financial Performance
Here’s a summary of the company’s latest financials: Revenues: Total revenue for the fiscal year 2023 was $4.7 billion, a decrease from the previous fiscal year, which is not a good sign. The Q3 2024 revenue came at $1.05 billion. Gross Profit: The company had a Gross profit of $1.61B which results to 34.2% gross profit margins, a relatively low number. For the Q3 2024 margins were 33.5%, which means a slight decrease. Operating Income: The operating income came at -$432 million in 2023, showing a high unprofitability problem and a very sharp decrease from $106.8 million in the prior year. It recovered for Q3 2024 to $78 million, which is a much more healthier number, but this trend must continue for a longer period of time before the company can be considered profitable. Net Income: The company had a net loss of $1,307 million, or an abysmal loss of $32 per share. This is a huge underperformance, which is explained in the notes that the company took on $946 million in noncash goodwill impairments. It did record a profit for Q3 2024 of $7.8 million after a year of losses. Cash Flow: It did not report the number, but indicated that cash flow was positive for the third quarter after several quarters of outflows. Balance Sheet: The company’s balance sheet has a strong negative debt, mainly long-term, the ratio between the debt and equity is alarming with the net-debt-to-equity at 2.22x. They have a total debt of approximately $4 billion. Total assets were at $14 billion. In conclusion, there is very high debt and that might create many issues in the coming years if the company is not profitable.
Understandability: 3/5
Coherent’s business is easy to understand from a higher perspective as it manufactures and sells laser systems, components, and materials. The company’s dependence on specific clients like those in semiconductor industry complicates the story. Their financial statements are complicated due to their huge M&A activity and require extensive analysis in order to calculate adjusted profit, revenues, etc. Furthermore, there are some complicated accounting procedures which further make this business hard to understand for an average individual. Thus the assigned understandability is slightly above the middle.
Balance Sheet Health: 2/5
Coherent’s financial health is troubling, primarily due to the high amounts of debt the company has taken on in order to finance multiple acquisitions and expansions. High levels of long-term debt put a huge pressure on its financials, especially if the company fails to be profitable and/or has to face high interest rates in the future. Moreover, the company’s current losses and cash outflow situation further exacerbates this problem. In conclusion, given the financial statements, it is clear that the company is not in great financial health.
Recent Problems and Controversies
Share Price Performance: Coherent has struggled to increase its share price and provide shareholders with a good return. It has struggled to stay above $50 price levels, but has also reached lows of less than $25 which indicates large volatility. Acquisition Difficulties: The company has struggled to fully integrate the acquired businesses and is also under pressure to quickly realize the synergies. *High Executive Turnover: * There have been some recent issues with management and C level turnover. Many top executives have left recently, putting some questions regarding the leadership of the company.
Management Commentary
Management Strategy: Management has stated that they are focused on their integration strategy and cutting costs to become more profitable. They believe that their long-term plan of becoming a company focused on materials and lasers will ultimately improve profitability and provide the best opportunities for shareholder returns. Cost-Cutting Measures: They are planning to cut expenses on many non-crucial operating and marketing programs in order to conserve cash flow. Management also mentioned that they are going to restructure a number of parts of the business to increase operating efficiency. *Acquisition Strategy: *Management is primarily focused on incorporating the acquired businesses within their existing structure and is not actively seeking new M&A opportunities.
In conclusion, despite recent struggles, Coherent Corp. possesses some attributes that can provide a good return for investors but they must take a closer look at their financials, which are not great at the time of writing and have many red flags.