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May 04, 2007 – Comments (0) | RELATED TICKERS: IIVI

Two Eleven (IIVI)  Reasoning: Business Shareholder friendly observations: Lead by Carl Johnson for 35 years now. Marvelous 20% insider ownership.Puts earnings and return on equity as their first few charts in their yearly report and posts 10Q as part of their yearly report – Brilliantly open!  40% sales done internally; provides insulation to declining USD. Current sales is at USD 232mYear end 2006 report shows that IIVI has a good handle on final products where their parts are used and are in the front end of R&D and new developments. Passionate! Sales are diversified globally and by industry. Addressable markets (total USD 910m): Infrared optical market – USD 235mNear infrared optical market – USD 250m Military Infrared optical market – USD 175mX-ray and Gamma ray radiation market – USD 50mSilicon Carbide substrate market – USD 50mThermoelectric coolers market – USD 50m Plants in Vietnam, Singapore and China. R&D in PA, United States.Smartly placed their state of the art (read IP sensitive) plant in Singapore where IP protection is a relative strength among Asian countries. They are using the Suzhou international park in China where the Singapore government has a stake in. Call it "China hardware, Singapore software" concept. Operational continuity and industrial engineering synergies. The low end manufacturing occurs in China and the high end (IP sensitive portion) is finished in Singapore. Singapore plant controls the Suzhou subsidiary in China which syncs well from a reporting structure perspective. Vietnam provides up to 4-year tax holidays (up to 8 years for some) for plants in VSIP and 50% discount on tax rates after for the next 4 years. Singapore’s corporate tax rate has been reduced to 18%Vertically integrated, globally diversified. Personally, I think this helps a lot for their R&D intensive business. Stated strengths are also the yield and quality of their products which may have to do with their vertical integration strategy.Some real-life examples that I have come across: Customized laser prisms are used for measurement of high precision and high pressure nozzles. It’s the strategic industry differentiator for diesel injection nozzles. Diesel cars are a growing market.The use of optics also greatly speeds up measurement capabilities (8 points for CMM vs. 5000 data points in seconds).  Risks: Relies on defense spending; deteriorating Federal budget may have an impact. But addressable market for military is about 35% of their total addressable market (guesstimate), impact is likely not going to be complete 100% loss because of the nature of their products include security scanning which is a basic airport necessity. On the other hand, military would be a US only business and will not be outsourced.  Reasoning: Financials Thumbnail valuation:Using USD 28 stock price as reference At growth at 20% (conservative) P/E range 30 to 40 and USD 25 million owners earnings, stock has potential of 18% to 25% appreciationI think of it as a good stock at a fair price.Links2006 Yearly Report from IIVI website

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