SiC Investment Bolsters Value Case For Coherent, Says Analyst

Needham analyst James Ricchiuti reiterated a Buy rating on the shares of Coherent Corp COHR with a $50 price target.

The analyst said yesterday's announcement that DENSO and Mitsubishi Electric would each invest $500 million in COHR's SiC business for a 12.5% stake was not a surprise.

When COHR announced in September that it was conducting a strategic review of the SiC business, the analyst thought the review would result in an announcement like the one yesterday, as opposed to an outright sale of the entire business. 

By retaining a 75% stake in the business, which will be operated as an independent subsidiary, COHR will be able to participate in its attractive growth prospects while gaining increased financial and operational flexibility, noted the analyst.

The agreement allows COHR to raise up to $500 million from additional partners in the new SiC subsidiary for six months following the close of the transaction in Q1CY24. 

With SiC cap-ex in F24 estimated to be 40%-50% of total cap-ex, the analyst believes the $1 billion combined investment in the SiC subsidiary frees up resources that can be redeployed for debt reduction.

The announcement has helped ease investor concerns about the company's debt burden following last year's acquisition of the legacy Coherent laser business, added the analyst.

Further, COHR's prediction that FQ1'24 revenue is expected to approximate the midpoint of guidance, helping to alleviate uneasiness investors have had about further macro-related weakness in the industrial and electronics markets, concluded the analyst.

Price Action: COHR shares are trading higher by 5.35% at $34.83 on the last check Wednesday.