With their scale, this increase in production and reduction in cost keeps them in front of everybody by about two to three years. The have a low-cost position, with their fiber lasers 2x to 4x the speed and half the cost of traditional lasers.
They have a key advantage in diode production, by producing their diodes mostly in the U. They have a big lead in technology, and are currently the only viable supplier of QCW lasers. It will probably be four to five years before anyone challenges them in that space. They are strong in proprietary IP, with patents and even more pending. Even more important than the patents, in my opinion, are the trade secrets and the knowhow that they have in the manufacturing processes.
The company has always been run that way. The key member of the management team is Valentin Gapontsev. They have a lean management structure, with hardly any layer of middle management. Everyone seems to work long hours and is focused on their jobs.
They have hard-nosed skeptical managers who think and act long term. Management compensation is amazingly reasonable and fair, for a company this good. In terms of the rest of the management team, there are a few Russian colleagues of Gapontsev who co-founded the company with him who are still in the business — a lot of experienced, long-tenured executives. I find him to be extremely helpful. I also like Trevor Ness, head of worldwide sales. He spends a lot of time out in the field, in the markets, and has great knowledge of all the end markets and what the customers are thinking of doing.
Corporate governance is excellent. They have solid practices in place on the Board of Directors in terms of director independence and various features. To summarize the key investment tenets, the company has substantial opportunity for growth, rapidly expanding applications, a large and growing market, fiber lasers gaining share, strong payback for customers, and lots of new product segments.
Their market position is dominant, they have a low-cost position, and vertical integration. These graphs are produced by a tool called HOLT, which is an excellent tool for looking at return on invested capital, because it corrects for a lot of different capital conventions across industries.
IPG has a history of very high and growing return on capital. If you correct for that cash, these returns continue to rise. The green dot on the graph represents the market implied return in the current stock price versus our scenario where the returns fade. This return on invested capital is composed of asset turns and margins which have been rising. Valuation is attractive across a variety of methods.
Ultimately, the company could be an attractive takeout candidate from a larger industrial company. This is a niche-dominating company, so I could see a large conglomerate paying a high multiple in a strategic deal to get access to both the technology and a growth market. It lowers the carbon footprint for customers who use the product.
What are the risks and concerns in the investment? They are exposed to a lot of global and industrial end markets, which means they are not recession proof. We bought the stock during tough industrial downturns where we thought the stock was disproportionately hit.
We sold it in late , early It could get worse before it gets better. If we end up having a full-blown recession, there could be lack of visibility and a downturn in orders. There could be negative results for a while. Exposure to a trade war with China is a risk.
If we can get some concessions, I think both sides are going to want to get to a resolution. Right now, the fear is built into the stock price and if we get a resolution, that will probably be positive for the company. Increasing competition at the low end of the market has been ever present for IPG, but more recently, there have been a lot of Chinese competitors selling below cost.
I mentioned that segregating manufacturing is one way to protect against this. They seem very paranoid about how to structure their business so that their intellectual property is protected. They have been operating successfully in places like Russia and China for a long time, so they seem to be more savvy than the average company in that regard.
They have a lot of capital sitting in working process inventory. They also believe in holding a lot of inventory so they can service their customers well. It could be viewed as both a positive and a negative. Some people worry about their exposure to Russia, given the political ups and downs that we have with Russia. A greater worry is whether they would ever get expropriated. He does not seem to have any connection to the Putin regime. We used multiple methods.
The same is true on an EV-to-revenue basis and on a price-to-free-cash-flow basis. Using a Finally, the HOLT scenario has a market-implied value. We look at the gap between the market implied and our scenario of how much the returns on capital will fade. None of these methods gives any credit for doing value-accretive tuck-in deals. They seem to do one every couple of years where they buy a small company.
We obviously give no credit for the big takeout scenario I mentioned with the large industrial conglomerate — doing a strategic deal. We look at a variety of numbers, including revenues, margins, working capital, capital spending requirements, all the way down to free cash flow. We also penalize for stock compensation, which is very modest in this company. Then we do a traditional DCF valuation model. Again, they can beat that.
We give them a small benefit for working capital management, and we give them more capital spending requirements to sustain growth in that scenario. The commoditization and competition in China is a permanent change, so we assume they lose part of their competitive advantage and become basically an economic grower within five years.
Q: Could you talk more about the market and how big you think it could get over time? What is laser technology replacing or obsoleting? A: There are a number of different markets here. The biggest and most important one is this materials processing business.
This is the cutting and the drilling — traditional machine tooling. This is a lot of older legacy technology where you have machines physically touching and impacting the material. These are blades, machines that are hammering and heating material, traditional welding machines.
These are markets that have been around for decades. The lasers that are not actually touching the material allow you to act at a distance, which allows you to be much more focused. It produces a higher-quality product and is more cost effective for the customer. Q: Could you please elaborate on the high or apparently high working capital needs?
A: It is very high relative to a other kinds of businesses, and it flows out of their strategy. Being a vertically integrated company where they insist upon producing all of their own components, it multiplies the number of things that they have in their working process inventory. Having to stock diodes, amplifiers — all sorts of components and materials —in their manufacturing centers is what contributes to that working capital.
They want to provide the best service in the industry. I think it flows from the CEO, who is the type of person who likes to control every aspect. There are tradeoffs in business in this type of decision making. Q: Can you talk a bit about pricing power given the large market share, and also, what percentage of capex could be considered maintenance?
A: Those are both excellent questions. In terms of the maintenance capital question, about three-quarters of their capital spending is growth capex, and about one-quarter is maintenance capex. I think they do need to keep spending in order to keep competitors at bay. Sorry, the first part of your question was on competition? How quickly is the Chinese competition moving upmarket? A: I think that is similar to the first part of the other question. There are a couple of other competitors around the world too.
There are two or three public companies in the U. I think that the industry is getting more competitive and that the two- to four-year competitive lead that IPG has had is going to shrink somewhat. It seems like that at various points in time, and they always seem to innovate faster and manage to maintain that lead, but it does seem to be a little different now, that there are more competitors out there.
A: In terms of the pricing component of that, they definitely have suffered a bit in the past six months. IPG claims that a number of Chinese competitors are actually selling well below their cost, and that those companies would go bankrupt pretty quickly if they continue selling at those levels. There have been cycles of this in the past. Categories : Companies based in Boston American companies established in Financial services companies established in Mutual funds of the United States establishments in Massachusetts.
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From the outset, Lasser pushed Putnam to excel as a full-service, multiproduct firm, with a strong presence in both retail and institutional markets, fixed income and equities. When he took over, retail eclipsed institutional and assets were mostly in fixed income.
Shoring up institutional marketing was one of his first orders of business. On the job for less than a year, Lasser faced his first crisis, which he characteristically seized as an opportunity to assert his authority. Lasser retaliated by suing Oechsle to prevent him from poaching clients -- a rare move in Boston's genteel money management community. Oechsle countersued, and the dispute escalated into a contentious public battle that eventually was settled out of court.
The terms were undisclosed, but within a year most of the clients in question had moved to Oeschle's new firm. About a year after the settlement, Lasser confronted a new threat. Interest rates spiked in the summer of , savaging Putnam's fixed-income portfolios. Most of the money was in bond funds. Brokers began to shun any fund labeled Putnam. The bond fund debacle taught Lasser an old lesson: Retail money can vanish in an instant.
To mend relations with brokers, Lasser hired William Shiebler, the Dean Witter Reynolds mutual funds chief, to run Putnam's mutual funds in the autumn of As he shifted his attention from retail to institutional, Lasser shrewdly determined, earlier than most of his peers, that the k market would soon take off. To target the new territory, he assigned Richard Pallan, who had joined Putnam as an analyst the same year as Lasser, to launch the business. Lasser also hired Boston Co.
Lucey built a fast-growing defined benefit business and helped Putnam win numerous new mandates. Putnam's investment process reflected Lasser's management style: The CEO liked to keep his portfolio managers on a short leash compared with their counterparts at rival firms.
Equities chief Carman executed Lasser's vision for an investment process that discouraged prima donna portfolio managers -- Lasser wasn't looking for another Peter Lynch -- and relied instead on a quantitative system of stock picking. Carman created a series of proprietary screens that narrowed a universe of 5, stocks into groups of to acceptable companies for any given style category. Research analysts were assigned to cover names on the list, and portfolio managers were not permitted to stray from the roster.
Lasser created a culture of perfectionism, often pitting executives against one another. Success was acknowledged, but even the smallest failure was scorned. Salesmen who lost out in the finals for a pension mandate had to endure a one-hour "loss-review" session with their bosses. The CEO's trademark: his "Lasser-grams," critical memos that lambasted everything from inferior performance to unwelcome food he once banned microwave popcorn. Lasser's approach worked. Putnam's investment pros delivered superior performance, enabling the money manager to grow faster than its rivals.
The retail marketing machine that Lasser had begun to build in the early s was also humming along. Performance explains some of their enthusiasm, but the firm's funds also consistently carried the highest sales loads in the industry. In the mids most Putnam equity funds carried a 5. Those loads prevail today.
Putnam's rhythm might have stalled in May when the much-admired Carman left Putnam to become CIO at Citigroup Asset Management, but Lasser used his departure as an occasion to reorganize the investment division. He consolidated Putnam's domestic and international equity groups into one department, to be headed by international equity chief Timothy Ferguson, who had joined the firm in from HSBC Asset Management, where he was president.
Initially, the move paid off in a big way, but longer term it backfired. Ferguson led Putnam deeper into the momentum growth game, which pulled in more and more cash. Veteran value portfolio manager Anthony Kreisel, who ran a large-cap value equity fund, was forced out. Thomas Reilley, the longtime head of Putnam's value equity team, was reassigned. Ferguson nudged some of Putnam's core equity portfolios into tech-heavy growth funds.
In Putnam hired C. Beth Cotner, a Kemper Financial Services portfolio manager, to lead the team running Putnam Investors, a large-cap core product, and shift it into growth gear. She produced strong returns over the next few years. Under Ferguson's leadership, a similar style shift took place in in both the New Opportunities and Voyager funds, which migrated from small-cap growth to large-cap growth stocks. Growth paid off in , when many Putnam funds delivered exceptional returns.
Voyager returned 56 percent. Most of Putnam's portfolio performance came in the fourth quarter, so sales did not take off until after the year-end numbers were in. Adds a former Putnam staffer: "Lasser was disappointed by fund sales in You could feel the pressure to keep up with the competition. In early Putnam launched an all-out assault on the retail front.
In June, three months after Nasdaq peaked, Putnam launched its first pure technology fund. The cash started to flow. While other growth fund managers were backing away from New Economy stocks by the first half of , Putnam portfolio managers stayed the course. By the end of , the young Technology Fund had lost 40 percent. New Opportunities dropped 30 percent and the Putnam OTC Emerging Growth fund plunged 46 percent, coming in next to last in Morningstar's ranking of growth funds.
Only Janus and Morgan Stanley saw greater outflows. Toward the end of , sobered by the dismal showing, Lasser ordered up a full-scale review of the firm's investment process. As Lasser assessed product lineups and performance track records across the Putnam organization, he concluded that the firm was saddled with too many growth funds and that stock pickers had stuffed their portfolios with far too many overpriced New Economy names and held on to them too long.
Lasser also tightened risk controls. Analytic software aimed at preventing portfolios from becoming too concentrated in any one security or sector, which had been available since about , became a mandatory tool for all portfolio managers.
Lasser's message to his investment team was a simple one: Stop swinging for the fences. Singles will do just fine. In October, Lasser demoted Ferguson, moving him into an amorphous "strategic and administrative" role. Though the two have been working closely together, Haldeman, it was clear from the start, would be Lasser's right-hand man in his campaign to save Putnam.
Haldeman has boosted morale, especially among investment professionals who appreciate his experience as a money manager. For all his talent Lasser had never managed a portfolio. Nor had Ferguson. He knows what it takes to succeed. One of Haldeman's first moves was to change how Putnam's investment professionals are paid. Earlier this year Haldeman informed the investment teams that, as of year-end , bonuses will be awarded to investment groups, not individual staffers. That approach should foster greater team cooperation, but it's also likely to cut into staffing.
If a group can manage with fewer people, the survivors could each enjoy a greater share of the bonus pool. Haldeman is trying to reverse this. In another key move, Haldeman tackled the most damaged area of the investment team -- specialty growth, which manages aggressive and small-cap products. For the better part of the past decade, the team was led by Daniel Miller and Eric Wetlaufer, who enjoyed considerable autonomy even as their performance deteriorated.
Haldeman placed specialty growth under the supervision of Justin Scott, who had been the CIO for core equity. Haldeman is also sending the message that he wants to strengthen the investment culture at Putnam, enabling portfolio managers to feel more engaged and appreciated. As one Putnam staffer puts it, "Haldeman has come in and told portfolio managers to relax and enjoy the process of managing money.
After interviewing key employees, Haldeman realized that as the New Economy bubble grew larger, portfolio managers were too often ignoring their own analysts' research. Brooks takes on a clear mandate to improve communication between analysts and portfolio managers. Certainly, Lasser and Haldeman have taken the first steps toward a turnaround, moving to restore the investment discipline that served Putnam so well for so many years. That's critical, because without stronger performance the money manager can never recover.
Putnam is hardly alone in its bear market mea culpa, of course. In today's tough market many mutual fund companies are rethinking the ways they do business. The ads are about being positioned for when the market turns, about getting past the resistance individuals might have when pitched a Putnam offer, and about convincing advisers that the company is serious about change.
But Putnam is still not out of the woods. And the message is a bit confusing. The news suggested the teams needed improving; the ads skipped that. Moreover, it's increasingly clear investors care less about the individual or team approach than about performance. In the trade press, Putnam has been touting the improved results of some of its funds, the ones that have been consistently above-average of late.
The real question for remaining Putnam shareholders, however, is a different. It goes like this: "Is your adviser convinced? Investors who fled Putnam knew what they wanted to do, but the ones who have been inert to now should view the ads -- you can find them at Putnam's web site -- and talk with their adviser to see if the person they trust for the decision feels confident that the George Putnam's vision really is back in place.
Says Roy Weitz of FundAlarm. That's what they pay the adviser for. And if someone has confidence in their adviser, but isn't so sure about Putnam, they should ask if -- after all of the changes that have been made -- the broker still stakes his reputation and business on Putnam. MW -- While the overall stock market has been in rally mode in the first few days of , initial public offerings are slow to get started. Dow Jones Industrial Average surpasses 30, level for first time ever.
Economic Calendar. Retirement Planner. Sign Up Log In. Home Chuck Jaffe. Chuck Jaffe Putnam ads try to win back investors Published: March 13, at p. ET By Chuck Jaffe. Face it: George was one busy guy. GE stock rallies after analyst turns bullish on growing confidence in aviation recovery.