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Why IQE plc is set to be a millionaire-maker stock

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Shares in IQE (LSE: IQE) jumped by more than 16% in early deals this morning to hit a new all-time high after the company reported that it had successfully raised £95m by way of a placing. 

The placing shares represent approximately 9.9% of the AIM-listed group’s share capital, but this dilution hasn’t held investors back. The firm announced its intention to raise funds after the market closed last night at 140p, with no premium to the prevailing market price.

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It looks as if investors who bought into the offering are already sitting on a healthy profit. 

According to IQE’s placing announcement, funds from the offering will be used to “accelerate the development of new products and technology; whilst protecting and enhancing its current positioning in a fast-moving marketplace.” Specifically, the company is looking to expand its manufacturing capacity in its new foundry, with the “purchase of up to 40-60 new MOCVD machines over the next three to five years.” This additional capacity should enable the firm to “address multiple mass-market opportunities, including its leading position in the production of VCSEL wafers for use in 3D sensing consumer electronic applications.

Put simply, it looks as if the placing will help IQE accelerate its growth at a time when there’s a rapidly rising demand for the company’s products. 

Buying ahead of growth 

Management’s decision to raise funds from investors to boost expansion looks to me to be an astute decision. It seems shareholders have been more than willing to support the company, and over the next few years, the accelerated growth should more than pay for the additional dilution. 

What’s more, by capitalising on this opportunity, IQE will be able to maintain its leading position in the market and remain ahead of competitors. At the same time, it’s likely that the firm will benefit from margin expansion thanks to improved output volumes. 

As of yet, City analysts have not had time to revise their forecasts for growth following today’s news. Current forecasts are predicting earnings per share growth of 3% this year for the firm, with 21% for 2018. 

However, I believe that these projections could be substantially revised higher as management reinvests in the business. 

Look to future earnings 

Based on IQE’s past growth, strong position in the market and investment in future expansion, I believe that as a long-term buy, the firm has a lot to offer. 

Even though today the shares don’t look particularly cheap (they have a forward P/E of 49 at time of writing) if IQE can continue to increase earnings at 20%, within five years the firm will be earning around 10p per share. This gives a five-year forward P/E of 16 at current prices. In this scenario, if the valuation remains the same (49 times forward earnings) the shares could surge to 490p. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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