This Company Is Still Getting Started

At the beginning of 2012, I set out to form The World's Greatest Growth Portfolio. Though I can't promise it will always live up to its moniker, the portfolio has returned 22% in just 10 months, besting the S&P 500 by about 9 percentage points.

A few weeks ago, I outlined exactly how I would go about building my portfolio for next year: Invest first and foremost in companies that demonstrate exceptional levels of innovation, with special emphasis given to those that I believe will be around decades from now.

Today, I'm going to take a deep dive into one of my current holdings -- IPG Photonics (NAS: IPGP) . Read all the way to the end, and I'll offer up access to a special free report on three stocks to own for the next industrial revolution.

A company with a laser focus
For those who may be unfamiliar with it, IPG is the market leader in fiber-optic lasers. These lasers can be applied to a myriad of uses, from welding heavy sheets of metal to helping build automobiles to assisting the military in detonating explosive devices from a safe distance.

As opposed to standard carbon-based lasers offered by Rofin-Sinar Technologies (NAS: RSTI) and Coherent (NAS: COHR) , fiber-optic lasers have been making huge leaps in strength over the past few decades. IPG's lasers are typically less costly for its customers -- both in their asking price and the amount of energy necessary to run them.

Recently, Newport (NAS: NEWP) and JDS Uniphase (NAS: JDSU) have also entered the fiber-optic laser market, though they still lag behind first-mover IPG.

What's the picture look like now?
Following IPG's most recent earnings release, the picture still looks bright for the company. Consider the following numbers, comparing the revenue, earnings, and free cash flow growth over the first nine months of 2012.

Source: SEC filings

While the increase in revenue and earnings were certainly positive, the company really boosted its free cash flow. This is due in part to the fact that IPG is vertically integrated. In other words, whereas other companies buy their laser diodes and other components from separate providers, everything that's included in an IPG laser kit is built and constructed solely by IPG.

During down times, this can pinch the company's profitability, but over the long run, it gives the company a huge advantage. The increase of free cash flow is due in part to this strategy.

Over the quarter, the company found that two industrial sectors were showing increased interest in IPG's fiber-optic lasers. The first were companies that use the lasers for precision welding and cutting of heavy pieces of metal. The second were consumer electronics companies, which use the lasers for marking and engraving.

As it stands right now, the company trades for 20 times earnings, and 37 times free cash flow. Though that's not cheap, it's also not unreasonably expensive for a first-mover in an ever-changing field.

Last year, IPG was a Tier One company in my portfolio, meaning I believed the company was innovative and would still be around 10 years from now, but wouldn't necessarily still be dominating the industry. I'm likely to keep the same posture in 2013.

Though IPG is certainly at the head of its industry right now, I also know that the pace of innovation is accelerating and there's no telling what might soon out-perform fiber-optic lasers and whether IPG will be the company to invent that product. That's why it won't be entering the territory of Core stocks next year.

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The article This Company Is Still Getting Started originally appeared on Fool.com.

Fool contributor Brian Stoffel owns shares of IPG Photonics. The Motley Fool owns shares of IPG Photonics and Rofin-Sinar Technologies. Motley Fool newsletter services recommend IPG Photonics and Rofin-Sinar Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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