Coherent Stock Could Drop 15% Despite Earnings Improvement

Coherent Inc. stock (NASDAQ: COHR) is up almost 1.8x since the beginning of this year, and at the current price of $264 per share, we believe that Coherent stock has around 15% potential downside.

Why is that? Our belief stems from the fact that Coherent stock is up 2.5x since 2018 end, and after the mixed recent trend in earnings, we believe Coherent stock could head lower. Our dashboard What Factors Drove 150% Change In Coherent Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Coherent is a manufacturer of laser equipment and components, used across a variety of applications. Coherent saw a 31% drop in revenue since 2018 (Coherent’s fiscal year ends in September), which combined with a meager 1% drop in the outstanding share count, led to revenue per share dropping by 31%, from $77.50 to $53.90.

Further, Coherent’s P/S (price-to-sales) ratio jumped from 1.4x in 2018 to 3x in 2019, due to a rise in investor expectations. Coherent Inc. saw a fall in profitability from 2018 to 2020, with EPS dropping from $10.07 to -$17.18 over this period, due to revenues falling faster than expenses, and a large $450 million goodwill impairment charge in 2020. However, Coherent’s P/S ratio has further jumped to almost 5x currently, riding the rally in semiconductor and technology stocks. We believe given Coherent’s mixed Q2 ’21 performance, there is a possible downside risk for the P/S multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have hampered industrial activity, leading to a drop in semiconductor demand from the industrial and materials processing sector. This severely hampered demand for Coherent’s lasers from these sectors initially, but demand has since picked up. This is evident from Coherent’s Q2 2021 results, where revenue came in at $374 million, up from $293 million for Q2 2020. Loss from operations improved from $449 million to $196 million over this period, despite a $232 million merger and acquisition charge. However, earnings in Q2 2020 included a large $451 million goodwill and other impairment loss, due to which EPS came in as low as -$17.39. In comparison, EPS for the latest quarter has improved to -$6.49.

However, it’s important to note that revenues in FY 2020 (at $1.23 billion) were significantly lower than those in FY 2018, which came in at $1.9 billion. Despite demand and revenues rising YoY in Q2 2021, given Coherent’s overall revenue and earnings trend since FY 2018, we believe that the company warrants a lower P/S multiple. While Coherent’s FY 2021 earnings (expected in November this year) will paint a clearer picture, we believe that in the near term the stock will see its P/S multiple decline from the current level of 4.9x to 4x, which despite being supported by a slight increase in revenues and margins, could result in the stock price shrinking to as low as $225, a downside of almost 15% from the current price near $264.

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