In early 2024, investor optimism surrounded Coherent (formerly II-VI), with its stock price experiencing a rapid surge. This positive sentiment was driven by substantial improvements in the company's financial performance, including enhanced earnings and a reduction in net debt. However, this impressive stock run has led to heightened expectations and demanding valuation multiples, prompting a closer examination of its long-term investment appeal.
Coherent's strategic decision to divest its aerospace and defense business is a key move aimed at accelerating deleveraging efforts. While this divestment is expected to bolster the company's financial health by reducing its debt burden, it is important to note that the sale was executed at a lower sales multiple compared to the company's core business. This aspect warrants consideration when evaluating the overall impact on Coherent's intrinsic value and future growth prospects.
The company has demonstrated a robust turnaround, marked by significant operational improvements and a strong performance in the AI and data center product segments. These areas are experiencing rapid expansion, and Coherent's involvement positions it favorably within these high-growth markets. The solid execution in these areas highlights the company's ability to adapt and capitalize on emerging technological trends.
However, despite these positive developments, a realistic assessment of Coherent's earnings, particularly after accounting for stock-based compensation, suggests a price-to-earnings (P/E) ratio in the mid-30s. Such a valuation indicates that the stock is currently priced for considerable future growth, which may limit its near-term upside potential for investors. The elevated P/E ratio underscores the high expectations already embedded in the current share price.
Given the demanding valuation and the lingering concerns regarding leverage, a cautious approach is advisable. While Coherent's operational strides and its presence in burgeoning markets are commendable, the current market pricing suggests that a more opportune entry point might emerge in the future. Investors might benefit from observing further developments and awaiting a more attractive valuation that aligns better with long-term risk-reward considerations.