II-VI Inc Valuation – July 2018 $IIVI

Company Profile (excerpt from Reuters): II-VI Incorporated, incorporated on June 22, 1971, develops and manufactures engineered materials, optoelectronic components and products for precision use in industrial, optical communications, military, semiconductor, consumer and life science applications. The Company has three operating segments: II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products. The Company’s II-VI Laser Solutions segment designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power carbon dioxide (CO2) lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names. The II-VI Laser Solutions segment also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and communication systems and manufactures approximately six-inch gallium arsenide wafers allowing for the production of lasers and integrated circuits sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names. The II-VI Photonics segment manufactures crystal materials, optics, microchip lasers and opto-electronic modules for use in optical communication networks and other consumer and commercial applications. In addition, the II-VI Photonics segment also manufactures pump lasers, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the optical communications market. The Company’s II-VI Performance Products segment designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications. In addition, the II-VI Performance Products segment designs, manufactures and markets engineered materials for thermo-electric and silicon carbide applications servicing the semiconductor, military and medical markets.


Downloadable PDF version of this valuation:

ModernGraham Valuation of IIVI – July 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,648,760,919 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.68 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 50.39% Pass
6. Moderate PEmg Ratio PEmg < 20 34.83 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.02 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.68 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.79 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass


Stage 2: Determination of Intrinsic Value

EPSmg $1.22
MG Growth Estimate 7.33%
MG Value $28.17
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $17.63
MG Value based on 0% Growth $10.34
Market Implied Growth Rate 13.16%
Current Price $42.35
% of Intrinsic Value 150.32%

II-VI, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.82 in 2014 to an estimated $1.22 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 13.16% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into II-VI, Inc. revealed the company was trading above its Graham Number of $20.43. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 34.83, which was below the industry average of 53.59, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.33.

II-VI, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $0.33
Graham Number $20.43
PEmg 34.83
Current Ratio 3.68
PB Ratio 3.02
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $746,145,000
Total Current Liabilities $202,586,000
Long-Term Debt $430,992,000
Total Assets $1,737,234,000
Intangible Assets $403,658,000
Total Liabilities $722,062,000
Shares Outstanding (Diluted Average) 72,382,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.30
Jun2017 $1.48
Jun2016 $1.04
Jun2015 $1.05
Jun2014 $0.60
Jun2013 $0.80
Jun2012 $0.94
Jun2011 $1.30
Jun2010 $0.63
Jun2009 $0.61
Jun2008 $1.06
Jun2007 $0.63
Jun2006 $0.18
Jun2005 $0.39
Jun2004 $0.28
Jun2003 $0.19
Jun2002 $0.13
Jun2001 $0.17
Jun2000 $0.14
Jun1999 $0.05
Jun1998 $0.13

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.22
Jun2017 $1.11
Jun2016 $0.92
Jun2015 $0.88
Jun2014 $0.82
Jun2013 $0.90
Jun2012 $0.94
Jun2011 $0.91
Jun2010 $0.68
Jun2009 $0.66
Jun2008 $0.63
Jun2007 $0.38
Jun2006 $0.25
Jun2005 $0.27
Jun2004 $0.20
Jun2003 $0.15
Jun2002 $0.13

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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