Coherent (COHR)

Materials and photonics company Coherent (NYSE:COHR) announced better-than-expected revenue in Q1 CY2025, with sales up 23.9% year on year to $1.5 billion. Guidance for next quarter’s revenue was better than expected at $1.5 billion at the midpoint, 2% above analysts’ estimates. Its non-GAAP profit of $0.91 per share was 6.2% above analysts’ consensus estimates.

Company Overview

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.

The sector could see higher demand as the prevalence of advanced electronics increases in industries such as automotive, healthcare, aerospace, and computing. The high-performance components and contract manufacturing expertise required for autonomous vehicles and cloud computing datacenters, for instance, will benefit companies in the space. However, headwinds include geopolitical risks, particularly U.S.-China trade tensions that could disrupt component sourcing and production as the Trump administration takes an increasingly antagonizing stance on foreign relations. Additionally, stringent environmental regulations on e-waste and emissions could force the industry to pivot in potentially costly ways.

Coherent's competitors include Lumentum Operations LLC and MKS Instruments in the photonics space, Wolfspeed in silicon carbide substrates, IPG Photonics in industrial lasers, and Broadcom and InnoLight Technology in optical communications components.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $5.6 billion in revenue over the past 12 months, Coherent is one of the larger companies in the business services industry and benefits from a well-known brand that influences purchasing decisions.

As you can see below, Coherent’s 22.9% annualized revenue growth over the last five years was incredible. This shows it had high demand, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Coherent’s annualized revenue growth of 7.5% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Coherent reported robust year-on-year revenue growth of 23.9%, and its $1.5 billion of revenue topped Wall Street estimates by 3.9%. Company management is currently guiding for a 14.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.9% over the next 12 months, similar to its two-year rate. This projection is admirable and indicates its newer products and services will fuel better top-line performance.

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Coherent has been an efficient company over the last five years. It was one of the more profitable businesses in the business services sector, boasting an average adjusted operating margin of 17.8%.

Analyzing the trend in its profitability, Coherent’s adjusted operating margin decreased by 1.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Coherent generated an adjusted operating profit margin of 18.6%, up 3.6 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Coherent’s EPS grew at a decent 8.4% compounded annual growth rate over the last five years. However, this performance was lower than its 22.9% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into Coherent’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Coherent’s adjusted operating margin improved this quarter but declined by 1.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Coherent reported EPS at $0.91, up from $0.53 in the same quarter last year. This print beat analysts’ estimates by 6.2%. Over the next 12 months, Wall Street expects Coherent’s full-year EPS of $3.14 to grow 31.2%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Coherent has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.1% over the last five years, slightly better than the broader business services sector.

Taking a step back, we can see that Coherent’s margin dropped by 13.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? 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 4.1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Coherent’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Coherent reported $909.4 million of cash and $3.77 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.28 billion of EBITDA over the last 12 months, we view Coherent’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $256 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were glad Coherent’s revenue outperformed Wall Street’s estimates. It was great to see revenue guidance for next quarter top analysts’ expectations, although EPS guidance was just in line, potentially suggesting lower-than-expected margins next quarter. The market seemed to be hoping for more, and the stock traded down 3% to $67.50 immediately following the results.

Updated: May 21, 2025 at 11:08 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Coherent isn’t a bad business, but we’re not clamoring to buy it here and now. First off, its revenue growth was exceptional over the last five years. And while Coherent’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its projected EPS for the next year implies the company’s fundamentals will improve.

Coherent’s P/E ratio based on the next 12 months is 19.3x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $95.35 on the company (compared to the current share price of $79.30).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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