3D Systems: A Great Story, but Way Overpriced

Thursday, 30 Jan 2014 07:05 PM

By David N. Frazier

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When stocks fell sharply last week, I decided that the time might be ripe to buy back several small-cap growth stocks that I had recommended previously to investors and stock-market speculators at much lower prices than where they were trading recently.

At the top of my list was 3D Systems (DDD), which I had initially advised stock speculators to buy on March 4, 2013, when the stock was trading at only $35.74. Since then, DDD had risen to an all-time high of $97.28 on Jan. 3.

3D Systems is a leading provider of three-dimensional content-to-print applications, including 3D printers, print materials, on-demand custom parts services and 3D authoring applications.

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The Rock Hill, S.C.-based company’s products replace and complement traditional printing methods and reduce the time and cost of designing new products.

Instead of investing in expensive tooling for mass production, which often requires long lead-times and costly freight charges to ship products, users of the company’s 3D products can customize and print prototypes and final versions of all types of products on a mass scale. And, they can produce those products in a more cost-effective way than they could by using traditional manufacturing methods.

3D System’s stereolithography apparatuses (SLAs), which it invented 25 years ago, uses a laser to sculpt plastic resin materials into physical models. Its ThermoJet solid object printer fabricates plastic models using a modified ink jet printing system.

The company’s customers include General Electric, Hasbro, and Texas Instruments. It operates in the United States, Europe and Asia.

After trading in a narrow sideways range from Jan. 4 to Jan. 10, DDD began to trend lower on Jan. 11, and it fell sharply last week as financial market participants exited stocks in response to what were reported to be some negative economic developments in China, Argentina and Turkey.

With DDD holding this past Monday above a key price-support level, and price momentum statistics indicating on that day that it was oversold substantially, on a short-term basis, I was eager to buy DDD and to get other stock market speculators back into the stock at what appeared to be a bargain price of around $75.90.

But I decided to do some more research before doing so.

At first glance, I was very encouraged by the fact that 3D Systems had continued to grow its revenues at very fast rates over the past few quarters, and that the company appeared to have made some very synergistic investments during the past 12 months by acquiring nine other makers and designers of three-dimensional printing equipment and related applications.

I was also impressed by the fact that 3D Systems was very strong financially, with its cash and short-term investments alone covering all of the company’s financial obligations by a ratio of 2.1-to-1 as of Sept. 30, 2013 (the latest date for which financial information is available).

However, I was unimpressed with the recent direction of the company’s profits.

Although 3D Systems’ revenues rose by 42.3 percent during the nine months ended Sept. 30, 2013, its net income rose by only 17.3 percent during that period. And, its net earnings per diluted share fell by 2.9 percent during that nine month period in response to the large number of shares of stock that 3D Systems issued to pay for the acquisitions that it made during that period.

While those acquisitions could very feasibly enable the company to increase its profits at a fast pace over the next couple of years, my research indicates that 3D Systems will not be able to grow its profits at a rate that would be fast enough to justify the current price of the company’s stock.

In regard to the company’s expectations for its future revenues and earnings, 3D Systems announced on Jan. 15 that it expects to double its revenues over the next couple of years.

However, the company did not make any comments about its net profit expectations other than saying that it was “reducing its non-GAAP earnings per share guidance.”

The company went on to say, “For the next few periods we are going for accelerated market-share expansion ahead of earnings per share.”

While that decision could turn out to be a very wise one, as further acquisitions by the company could result in 3D Systems becoming the dominant player in the three-dimensional printing industry, it could also be a disastrous decision if the demand for 3D printers does not increase by as much as the company expects.

In light of the fact that persons who invest in, and speculate on the price direction of, growth stocks tend to exit those stocks en masse when the profits of those stocks’ underlying companies do not meet the expectations of Wall Street analysts, 3D Systems’ decision to prioritize market share expansion over earnings growth could also lead to more sharp drops in the company’s stock.

With 3D Systems’ stock closing at a price-to-earnings (P/E) multiple of approximately 175 on Jan. 30, and my research indicating that the company will be able to grow its earnings per share at rate of no higher than 50 percent over the next three years, my experience suggests that financial market participants are still overvaluing DDD substantially.

In fact, my research indicates that DDD would need to fall to around $35 to justify an investment in that stock.

Therefore, I encourage investors and speculators alike to avoid DDD at this time.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.



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