When Nasdaq (QQQ) fell sharply in the last few trading sessions, shares of Coherent (COHR) also fell. The weak stock markets are not the only reason for the underperformance of this scientific and technical instruments firm. II-VI (IIVI) is set to acquire the company. But China’s issues about the deal suggest the deal is not a 100% guarantee.
Investors should look at considering the upside based on the odds of the deal completion. Second, if the deal falls through, readers should assess Coherent’s prospects without II-VI buying it.
The II-VI announced the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. This was one milestone for II-VI and Coherent to meet. More recently, confidence in the deal going through weakened. China’s antitrust authority, The State Administration for Market Regulation, expressed its concerns to the companies. SAMR apparently interviewed companies in the laser and materials industry. Still, if the deal goes through, COHR shareholders will get $ 220 in cash and 0.91 IIVI stock. On March 8, 2021, IIVI stock closed at $ 63.33.
Last year, Coherent paid Lumentum (LITE) a $ 217.6 million termination fee so that it could enter the deal with II-VI.
Readers who are betting that the deal will fall through may consider buying II-VI stock instead. II-VI would not have post-acquisition risks. Amid weak stock market conditions, investors prefer to buy companies that conserve their cash and grow organically.
In the scorecard below, SA authors rate IIVI stock with a strong buy. Analysts also have a buy rating:
Coherent has a strong quant rating. It has a history of strong growth. The stock also benefits from good momentum, earning an A. Lumentum is also worth considering because it gets an A grade on profitability and momentum.
First Quarter Results
In the first quarter, Coherent posted non-GAAP earnings per share of $ 2.32. Revenue grew by 17.9% Y / Y to $ 384.5 million. The company posted flat sequential revenue growth because of historical seasonal weakness. The pending merger also distracted it from focusing on sales. Still, bookings grew, with book-to-bill greater than 1.0. Coherent ended the quarter with the highest quarter-end backlog in over three years.
Notable costs in the quarter included stock-based compensation of $ 29.6 million, up from $ 10.6 million. This amount is modest compared to high-flying companies like Twilio (TWLO), PayPal (PYPL), and especially Palantir (PLTR). This suggests that in a post-merger scenario, the combined II-VI and Coherent entity should perform well in the years ahead. Research and development costs were steady Y / Y at $ 1.24 million. Furthermore, Coherent added just $ 19.7 million in vested restricted stock units in its selling, general and administrative costs.
The company expects the merger will close in the middle of the second calendar quarter of this year.
Coherent is developing higher-speed data rate transceivers. Despite a market-wide constraint on the supply chain, customers are able to get a broad offering that II-VI supplies.
Unfortunately, the supply chain constraint is slowing 100G sales. Despite the headwinds, Coherent does not have any price pressures for 100G and its legacy products. The company will sustain healthy margins since there is no average selling price pressure. Moreover, strong demand for its components permitted Coherent to increase prices. As it accelerates designs, it will enjoy an acceleration in demand.
In the industrial space, Coherent established product demand. Expect margins to expand steadily as a result.
Coherent incurred extra costs in its communications business. To get components on time, it paid extra so that it could meet customer needs. This strengthens customer satisfaction. Customers also get the best value, which will lead to more business in the future.
Coherent has $ 1 billion in bookings for the quarter. It benefited from increased demand from customers. It also proactively asked customers to prepare orders for the longer term. This lets Coherent plan its workload for at least the next six months.
Coherent expects capital expenditures in the range of $ 325 million to $ 375 million. As lead times get longer, investors should anticipate CapEx heavier in the latter part of the fiscal year of 2022.
The company initially expected investments of between $ 60 million and $ 70 million for silicon carbide in the first quarter (June 2021). Fortunately, it spent around $ 10 million. It benefited from achieving operational efficiency. Thanks to Coherent’s lower start-up costs, investors should expect stronger profit growth next.
COHR stock returned 88% since I first wrote about the company. It beat the S&P 500’s return of 39.75%. In the near term, the delayed merger deal might pull IIVI stock lower. Based on its chart, markets may send COHR stock to $ 250 next:
If doubts arise that the deal will not close, COHR stock may fall to the $ 230-240 range.
Coherent demonstrated strong performance since 2019. It has industrial products that customers will need for the next 10-20 years. Whether the merger closes or not, investors may hold a fundamentally strong company in a growing market. Demand for Coherent’s lasers continues to rise. That will lift its profits sustainably.
Coherent is a suitable long-term investment. Conversely, short-term traders may bet on the dip in IIVI and Lumentum stock to end. A small, sustainable reversal in Nasdaq’s sentiment to the upside would give IIVI and LITE stock a strong lift.