Investing.com -- JPMorgan has placed shares of Coherent Inc (NYSE: COHR ) on its Positive Catalyst Watch ahead of the company’s upcoming Analyst & Investor Day scheduled for May 28.
The move comes as the Wall Street giant expects Coherent will update its long-term financial targets in a way that supports a pathway to stronger earnings and valuation potential.
The investment bank anticipates management will unveil a new set of performance goals, including a pro-forma revenue compound annual growth rate (CAGR) of over 10% from fiscal year 2025 to 2028.
“The company has seen solid revenue growth, particularly in the Communications sector, driven by Datacom, while maintaining a balanced focus on profitability across its diverse and broad Industrial businesses. Looking ahead, we expect more of the same,” analysts led by Samik Chatterjee said in a note.
They also expect the company to raise its long-term gross margin target to 43%+, backed by strategic actions such as price hikes, cost cuts, and the shutdown or divestiture of low-profit operations.
“Importantly, the new gross margin target should be complemented by the disciplined management of operating expenses we have become accustomed to with the new management team,” the analysts continued.
This should help Coherent achieve a long-term operating margin target in the 23%+ range, which, together with the company’s efforts to cut debt, "should lead investors to an earnings power of $7+ per share,” the analysts added.
Since CEO Jim Anderson assumed leadership in June 2024, Coherent has delivered improved financial results. Year-over-year, revenue rose by more than 20% and operating margin expanded by over 300 basis points. The growth has been driven largely by Communications, with Datacom revenue increasing more than 50% annually.
The chip materials supplier’s balance sheet has also strengthened. Debt reduction has accelerated to an average pace of $125 million per quarter, helping push the net debt-to-EBITDA ratio to around 1.6x and contributing over $0.30 per share through lower interest expenses.
JPMorgan values the $7+ long-term earnings estimate at around 20x, implying a bull-case valuation exceeding $140 per share.
“We expect the aforementioned to underscore as well as reinforce the significant upside potential,” the note concluded.