IIVI Investors Should Take 'A Breather,' Morgan Stanley Says In Downgrade

II-VI, Inc. (NASDAQ: IIVI) remains a "premier business with premium valuation," but the stock's recent move higher implies that now is a good time for investors to stay neutral, according to Morgan Stanley.

The Analyst

Morgan Stanley's Meta Marshall downgraded IIVI from Overweight to Equal-weight with an unchanged $46 price target.

The Thesis

IIVI's NTM P/E multiple expanded by three points since March from 20 times to 23 times the consensus estimate, Marshall said in the downgrade note. As a result, the stock now appears less attractive in the optical space, and a NTM P/E multiple of 23-24 times captures potential opportunities in 3-D sensing, the analyst said. 

Iinvestors should consider holding the stock in the long run, as it boasts pricing power in its position as one of a few suppliers to many customers, Marshall said.

IIVI should be able to consistently grow profits faster than revenue as it gains scale on investments, especially in markets that are relatively small today but that are likely to grow over time, such as VCSELs for 3-D sensing applications, according to Morgan Stanley. 

The sell-side firm's $46 price target implies minimal upside potential and is based on a "generous," but not out-of-line, multiple in the optical space, Marshall said. If the company's revenue or operating margins outperform versus expectations, the case for the stock's multiple to expand to 25 times NTM EPS can be made, the analyst said. 

Price Action

Shares of II-VI were trading lower by 2.88 percent at the time of publication Monday afternoon.

Related Links:

Rosenblatt: What Apple's Quest To Add More 3-D Sensing Applications Means For Suppliers

Morgan Stanley's Guide On How To Play The Optical Space