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2018 has been rough for technology component makers, and laser and laser-based systems manufacturer Coherent (NASDAQ: COHR) has been no exception. The stock is down 56% year to date as of this writing as sales have slowed, and management's early 2019 forecast indicates business will be stuck in a rut for some time. However, after such a big sell-off, value investors will want to take a look.
2018 says it's a go, but 2019 expectations say no
| Metric | Nine Months Ending June 30, 2018 | Nine Months Ending July 1, 2017 | Year-Over-Year Increase |
|---|---|---|---|
| Revenue | $1.44 billion | $1.23 billion | 17% |
| Cost of sales | $800 million | $705 million | 13% |
| Operating expenses | $330 million | $314 million | 5% |
| Earnings per share | $6.98 | $5.39 | 29% |
| Adjusted earnings per share | $10.42 | $8.85 | 18% |
Data source: Coherent quarterly earnings.
While numbers for the first nine months of the fiscal year look great, expectations for the future are what really matter on Wall Street. Sequential results show that business is grinding to a halt at Coherent. In the most recent quarter, sales and adjusted earnings -- which back out stock-based compensation and amortization of assets -- were both 4% higher than in the prior year, and sales were flat with the quarter preceding.
Part of the slowdown is due to OLED panel manufacturers, which Coherent sells lasers to in the aid of production and testing of the screens. Manufacturers will be slowing down their production line updates in 2019, but Coherent still sees a long-term growth trend for the next few years as smartphone, tablet, and TVs make the switch from LED to the more efficient and higher picture quality OLED screens. Growth from OLED manufacturing should pick up again in 2020.
Other quarter-over-quarter weakness was seen in material processing, laser components, and consumer goods applications, as well as noted weakening in China. Declines were offset by continued strength in auto manufacturing, medical devices, and aerospace and defense. However, with Coherent's OLED business set to slow down next year and offset areas of growth, management called for total sales to be flat in 2019 compared with 2018.
Image source: Getty Images.
Are things really that bad?
So how do flat expectations on an annualized basis equate to a 50% share-price decline? Part of the drop was an adjustment to the sky-high expectations priced in at the onset of the year, but there is also worry that things could get worse than what management is forecasting for next year. Adding weight to that concern are the preliminary fiscal fourth quarter numbers that were given ahead of the official Nov. 6 report.