The new positions on the list are IPG Photonics (IPGP), Balchem Corp. (BCPC), Proto Labs (PRLB), and Materion Corp. (MTRN). Of the four companies, Proto Labs is the only one that has not been in our portfolio before, and even with that one, we have been monitoring the company closely for years.
IPG Photonics and Proto Labs join our collection of high-quality, secular growth but also industrial/cyclical businesses that have been hit by a double whammy of tougher end-market conditions and unforgiving capital markets. IPGP is the dominant producer of fiber lasers, which continue to take market share from more traditional laser types, such as CO2 and YAG, due to their ability to cut/weld a variety of materials, lower electricity usage, lower maintenance costs, and smaller physical footprint. While investors may have been disappointed with IPGP’s 1Q:16 results and outlook in the context of the company’s historical growth rates, we viewed them as decent considering the weakness in global industrial capital equipment spending trends. We bought the stock on the post-earnings dip and plan to hold for a while.
Like IPGP, Proto Labs delivered 1Q:16 results and guidance that were decent in the context of a weak capital equipment spending environment but disappointing compared to the company’s historical growth rate. In our view, both companies’ secular growth and market share gain stories remain well intact. In PRLB’s case, what makes the company special is its proprietary software that automates, and in turn, greatly speeds the process and reduces the cost of manufacturing industrial parts/prototypes. In our view, the case for PRLB’s system relative to traditional part outsourcing is similar to that of Amazon.com relative to store-based retailers— the selection is much greater, the prices are much lower and the process is much faster.
Balchem does not have quite the secular growth story of IPGP or PRLB, however, it too is a high-quality company. BCPC dominates highly-niche, specialty chemicals markets/applications including medical device sterilization, oil/gas well clay stabilization, human and animal nutritional supplements, and powder-based ingredients/flavor additives. We like BCPC at this point for choline’s likely increased adoption in human diets (due to FDA suggestions), for the clay stabilization business’ cyclical recovery potential, and for the long-awaited ramp up of encapsulation solutions for an autism drug being developed by Curemark.
While we would be lying if we described Materion as a high-quality business (we have often been short the stock in the past based on the opposite), we do think the company’s end markets are near cyclical lows, the balance sheet is in good shape, and the stock and earnings have significant snap-back potential if the economic outlook improves.
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