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2 Laser Stocks to Watch in a Challenging Industry

Nov 09, 2023

The Zacks Laser Systems and Components industry suffers from the pandemic-induced supply-chain disruptions, including parts and labor shortages. A strong U.S. dollar, along with raging inflation, weak economic conditions in Europe and lockdowns in China, are major headwinds. The demand-supply mismatch is expected to persist in the near term, hurting the prospects of the industry participants. Nevertheless, upbeat demand from electronics, semiconductors and healthcare end-markets is a major growth driver. IPG Photonics IPGP and Cutera CUTR are well-positioned to benefit from these trends. Robust demand for high-power continuous wave and pulsed laser for cutting and battery-processing applications, growing demand for high-performance optical devices, and ongoing adoption of cloud computing, autonomous driving, IoT and 5G are the key catalysts for the industry participants.

Industry Description

The Zacks Laser Systems and Components industry comprises companies offering high-performance fiber lasers, fiber amplifiers and diode lasers, optical and photonic products, and scanning technology solutions. The key end markets are semiconductors, metrology, advanced communication and medical devices. Industry participants also provide high-precision 3D sensors and system products for inspection and metrology. Moreover, in the medical devices space, laser and other energy-based aesthetic treatments can achieve therapeutic results by affecting structures within the skin. Developing safe and effective aesthetic treatments has resulted in a well-established market for these procedures. The company also operates in the cyclical surface mount technology and semiconductor capital equipment markets.

3 Laser Systems & Components Industry Trends to Watch

Emerging Applications Driving Demand for Lasers: The industry is benefiting from increasing demand for emerging applications like additive manufacturing, facial recognition, gesture recognition, LiDAR applications and IoT. Advanced lasers, especially those with 3D sensing (3DS) capabilities, are enhancing interactions using technology. Notably, 3DS — the technology that allows users to create 3D printable objects, control games with body gestures and measure objects — is in demand.Laser-IoT Combination Supports Efficiency: As industries are increasingly adopting automation techniques, combining lasers with IoT improves operating efficiency. IoT-supported manufacturing equipment is far easier to update with firmware. The combination reduces costs, and increases flexibility and reliability manifold by enabling material handling capabilities through remote sources. Strong demand from semiconductor and allied markets, which are seeing a rapid shift toward the production of micro and nano devices, is another positive for industry participants.Supply-Chain Disruption Hurts Prospect: Industry participants suffer from the pandemic-induced supply-chain disruptions. The demand-supply mismatch is expected to persist in the near term, hurting the prospects of the industry participants. Moreover, raging inflation, a strong U.S. dollar, energy headwinds in Europe and COVID-related lockdowns in China are expected to hurt the industry participants in the near term.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Laser Systems and Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #222, which places it in the bottom 11% of more than 250 Zacks industries.The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry's position in the bottom 50% of the Zacks-ranked industries results from the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group's earnings growth potential. Since Dec 31, 2021, the Zacks Consensus Estimate for the industry's earnings for 2023 has declined a whopping 33.6%.Despite the gloomy outlook, there are a couple of stocks worth watching in the industry. But before we present the top industry picks, it is worth looking at the industry's shareholder returns and current valuation first.

Industry Underperforms Broader Sector and S&P 500

The Zacks Laser Systems and Components industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.The industry has declined 44.7% over this period against the S&P 500's fall of 19.2% and the broader sector's slip of 33.1%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing Laser Systems and Components stocks, we see that the industry is currently trading at 5.34X compared with the S&P 500's 3.40X. It is also trading above the sector's trailing 12-month P/S of 3.03X.Over the last five years, the industry has traded as high as 12.64X, as low as 3.19X and at the median of 6.55X, as the chart below shows:

Trailing 12-Month Price-to-Sales (P/S) Ratio

2 Laser Stocks to Keep a Close Eye on

IPG Photonics: Oxford, MA-based IPG Photonics develops and manufactures fiber and diode lasers, fiber amplifiers, and transceivers for diverse applications like materials processing, advanced applications, communications and medical. The stock has declined 38.5% in the past year.IPG Photonics is riding on strong demand for its core material processing product. The company is benefiting from accelerated growth in welding, marking and 3D printing in North America and Japan. Strong demand for A&B lasers is driving IPG's growth, particularly from electric vehicle battery manufacturers.The Zacks Consensus Estimate for IPGP's 2023 earnings has been unchanged at $4.64 per share in the past 30 days. IPG Photonics currently has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Cutera: Based in Brisbane, CA, this Zacks Rank #3 company offers medical device products. The stock has gained 10.5% in the past year.Cutera benefits from substantial Skincare revenues. Consumables sales growth remains strong, driven by the continued recovery of energy-based treatment volumes. However, the rapid devaluation of the Japanese Yen against the US dollar has been concerning.The consensus mark for Cutera's 2023 loss has been unchanged at 29 cents per share over the past 30 days.

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IPG Photonics Cutera Emerging Applications Driving Demand for Lasers Laser-IoT Combination Supports Efficiency Supply-Chain Disruption Hurts Prospect IPG Photonics the complete list of today's Zacks #1 Rank (Strong Buy) stocks here Cutera