Will Coherent Stock Rebound To Levels of Around $100 Seen In 2021?

COHR: Coherent logo
COHR
Coherent

The stock price of Coherent Inc. (NYSE: COHR), a semiconductor company, trades at $70 per share, about 30% below its peak level of $100 seen in February 2021. In contrast, Lattice Semiconductor (NASDAQ: LSCC) stock saw a 15% decline. COHR stock was trading at $71 in early June 2022, just before the Fed started increasing rates, and is now close to that level, compared to a substantial 40% gain for the S&P 500 during this period. Our detailed analysis of Coherent’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

Coherent stock saw a solid 22% rise, on Monday, June 3, after the company announced a new CEO – Jim Anderson – who was earlier heading Lattice Semiconductor. Under his leadership, Lattice saw its stock surge a spectacular 12x from $8 in Sep. 2018 to $98 earlier this year. Given the strong performance of Lattice in the last six years, investors have given a thumbs up to Coherent stock after its change in leadership.

The performance of COHR stock with respect to the index over the last three years has been lackluster. Returns for the stock were -10% in 2021, -49% in 2022, and 24% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that COHR underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could COHR face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? The $68 average of analysts price estimates is close to the current market price of $70, implying that after its recent surge, COHR stock appears fully valued.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024.

In contrast, here’s how COHR stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Coherent and S&P 500 Performance During 2007-08 Crisis

COHR stock declined from $18 in September 2007 to $9 in March 2009, as the markets bottomed out, implying it lost 49% of its pre-crisis value. It recovered to $16 levels in early 2010, reflecting a solid 77% growth between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Coherent’s Fundamentals Over Recent Years

Coherent’s revenue increased 2.2x from $2.4 billion in 2020 to $5.2 billion in 2023, and $4.6 billion over the last twelve months. II-VI acquired Coherent in 2022 and renamed the company as Coherent. The laser business of the legacy Coherent has driven the sales growth in recent years. Coherent’s earnings per share stood at $(2.93) in 2023, versus $(0.79) in 2020.

Does Coherent Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Coherent’s total debt surged from $2.4 billion in 2020 to $4.5 billion now, while its cash increased from $493 million to $822 million over the same period. The company garnered $634 million in cash flows from operations in 2023. The company has a high debt, but it should be able to meet its near-term obligations. Its debt as a percentage of equity currently stands at around 42%.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe COHR stock has the potential for more gains once fears of a potential recession are allayed. While its stock may see some positive action from the recent change in leadership, it is unlikely to see the levels it was trading at in 2021, anytime soon. Furthermore, high debt levels remain a near-term concern for the company. 

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 COHR Return 23% 61% 136%
 S&P 500 Return 0% 11% 136%
 Trefis Reinforced Value Portfolio 0% 4% 639%

[1] Returns as of 6/4/2024
[2] Cumulative total returns since the end of 2016

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