Coherent has gotten torched over the last six months - since October 2024, its stock price has dropped 33.4% to $64.20 per share. This might have investors contemplating their next move.
Is there a buying opportunity in Coherent, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the cheaper entry price, we don't have much confidence in Coherent. Here are three reasons why you should be careful with COHR and a stock we'd rather own.
Why Is Coherent Not Exciting?
Created through the 2022 rebranding of II-VI Incorporated, a company with roots dating back to 1971, Coherent (NYSE:COHR) develops and manufactures advanced materials, lasers, and optical components for applications ranging from telecommunications to industrial manufacturing.
1. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Coherent’s EPS grew at an unimpressive 4.2% compounded annual growth rate over the last five years, lower than its 25.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Coherent’s margin dropped by 11.6 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Coherent’s free cash flow margin for the trailing 12 months was 4.3%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Coherent historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.3%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
Coherent’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 17.8× forward price-to-earnings (or $64.20 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
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