II-VI Inc. (IIVI): 'Crystal' clear buy in optical systems

"The famous investor Peter Lynch said that he always loved companies with funny names; he would be right at home with II-VI Incorporated (NASDAQ: IIVI)," says Dave Dyer.

Indeed, he adds, "This is the first time I have ever had to call a company just to find out about their  name." In his Dave Dyer's Newsletter, he explains the answer -- and his reasons for being bullish on this operator in the scientific field of crystal growth technology.

"When I contacted the company, a nice young lady answered the phone as 'Two Six Corporation.' She explained that the name came from the Roman numerals II and VI which, in turn, refer to the columns of the periodic table of elements that contain the raw materials they use to grow crystals.

"Zinc comes from column II and Selenium from column VI. This is a seriously geeky company, but they do some serious things. IIVI’s crystals go into high-end optical systems for military, aerospace, telecom, and medical applications. They have over 5,000 customers around the world.

"They have benefited from the increased use of lasers for industrial applications like cutting or marking. The crystal at the heart of a laser does wear out, and that replacement business provides a steady, predictable revenue stream for IIVI. As much as 50% of their business comes from replacement parts.

"This is an American high technology company with a global market. About 42% of their business comes from international customers. There are strong barriers to market entry by competitors. Synthetic crystals are difficult to grow, and IIVI has been doing it since 1971, so their expertise is hard to duplicate.

"Their vertical integration from material growth to fabrication of optical components makes them unique in their markets and gives them an additional edge in controlling quality.

"Quarterly revenue growth has been accelerating over the past year (9%, 11%, 15%, 24%, and 25%). EPS growth has been even better, ranging between 19% and 33% per quarter. They have a healthy
ROE of 20% and very little debt.

"The last 10 years have been good for IIVI shareholders. If someone held it from the 1999 low point of about $2 to its current price in the high 30s, they would have seen about an 1800% gain.

""IIVI is still a fairly small company, with a market cap of $1.1 billion. The stock was added to the S&P Small Cap 600 index on May 30, which could lead to some near-term buying as the index ETFs add it to their portfolio.

"It may also result in some more long-term exposure for this very interesting company. After an 1800% run over ten years, they certainly deserve to be noticed."