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Looking Beyond the Disappointing Results of This 3-D Printing Stock
Posted by: Sarfaraz A. Khan (IP Logged)
Date: April 14, 2014 10:56AM

ExOne (XONE) has recently released its quarterly results that disappointed investors as the company swung to a surprising loss. Moreover, its forecast was also well below market’s expectations. Its shares are down 54.6% this year and closed at $27.56 on Friday.

Despite all the pessimism, the 3-D printing industry is growing at an accelerated pace, driven by strong demand from bigger enterprise buyers. ExOne is betting its future on the growth of the metals printing industry, including the replacement parts market. The company has already attracted some big enterprise customers. With the decline in prices, ExOne could attract even more clients.

For the current year, ExOne has forecast at least 40% revenue growth.

Disappointing Earnings

In the fourth quarter, ExOne’s revenues fell 16.1% from last year to $10.7 million as the company swung to a net loss of $3.20 million, or $0.22 per share, from a profit of $902,000. Analysts, on the other hand, were expecting a profit of $0.01 per share from revenues of $12.1 million.

During the quarter, ExOne sold 12 3D printing machines, an improvement from eight printers sold a year ago. However, the company managed to sell just three higher-margin S-Max printers, as compared to five in the corresponding quarter last year. As a result, the machine's revenues, which are 66% of the company’s total revenues, dropped 21.3% to $7 million.

Revenues By Product Line

4Q12

4Q13

% Change

3D Printing Machines &Micromachinery

$8.90

$7.00

-21.3%

3D Printed Products, Materials and Other Services ("PSC")

$3.80

$3.70

-2.6%

To exacerbate the situation, ExOne witnessed a 14% jump in production costs to $7.4 million. As a result, the company’s gross margins dropped from 40.6% last year to 30.9% in the previous quarter.

Last year, ExOne predicted 80% increase in sales, but in January, the company cut down this forecast to 40% as it struggled with order delays. In 2013, the company could only post a 38% increase in revenues to $39.48 million while its losses narrowed to $6.46 million from $10.17 million in 2012.

Other Players

On the other hand, in the previous quarter, the industry titan 3D Systems (DDD) has reported a 52.4% year-over-year increase in revenues to $154.8 million while its net income has climbed 11.8% to $13.03 million. Similarly, Stratasys (SSYS) also posted a massive 118% growth in quarterly revenues to $155.1 million as it shrunk its losses to $1.99 million from $4.23 million a year ago.

Why Invest?

However, investors still have a lot to look forward to. ExOne, unlike most of the other players in this industry, is pursuing only the industrial customers that require printing of metal objects. ExOne is essentially targeting a niche, which is itself in early stages of development.

The company is also working on adding aluminum and titanium as printable materials. Moreover, ExOne is expanding its Production Service Centers, or PSCs, as it aims to increase its customer base. ExOne usually attracts clients first to its PSCs, who then later move to purchase its printers.

Investing in ExOne is a bet that the company will eventually dominate the metal printing industry, and that metal printing will become a huge market.

For ExOne’s customers, the biggest advantage of using its 3-D printers is its flexibility and complexity. For instance, ExOne’s printer can produce a pump impeller as a single unit as opposed to conventional methods which require the equipment’s assembly from 13 different parts.

Moreover, 3-D printing is also making its way in the replacement parts market, particularly those that are harder to find. When small quantities of replacement parts are required, then instead of relying on the original suppliers, ExOne’s customers can simply use their 3-D printer.

Moreover, other players in the market, such as a company called rp+m, are establishing themselves as the suppliers of hard-to-find replacement parts by using ExOne’s printers.

ExOne has already attracted some big customers; such as Caterpillar (CAT), United Technologies Corp’s (UTX) Sikorsky helicopter unit and Ford (F).

Analysts, however, believe that in order to compete with the traditional manufacturing techniques, the 3-D printers should be quicker, and a whole lot cheaper.

Positive Industrial Outlook

It appears that the industry is moving in that direction as the printers are getting faster and cheaper. Consider ExOne, which sold 12 3-D printing machines in fourth quarter 2012 for $7 million. This translates into average selling price of around $583,000, a big drop from the average selling price of $1.1 million in the same quarter last year.

The decrease in price is also partly attributed to the reduction in manufacturing cost. The reduction in selling prices of 3-D printers has significantly increased the pool of potential buyers. Moreover, the industry itself is growing at an accelerated pace. According to the research firm Gartner, the 3-D printing expenditure climbed 43% in 2013 to $412 million. In 2014, the 3-D printing expenditure could rise by 62% to $669 million. A significant portion of this demand, more than 75%, comes from large, enterprise buyers.

These factors have reduced the barrier to entry, and have made 3-D printing even more attractive for new entrants. The future, therefore, could become more challenging with increased in competition, particularly since the leading technology companies, like Hewlett-Packard (HPQ), could also enter this market from as early as October. Hewlett-Packard, which is already the market leader when it comes to 2-D printing with a 40% market share, has said that it has solved the problems associated with slow speed and poor quality of 3-D printing.

Forecast

Although ExOne has a poor track record of delivering on its promise, as it has missed every analysts’ estimate since its inception, it appears that the company is now under-promising. Moreover the market’s expectations are also pretty low.

For 2014, ExOne is eyeing a 40% to 50% increase in revenues to between $55 million and $60 million, which was considerably lower than market’s expectations of $61.6 million.

As per data compiled by Thomson Reuters, analysts are now expecting 44.3% growth in revenues to $57 million while its losses could shrink to $0.17 per share, from $0.47 per share last year.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.



Stocks Discussed: XONE, DDD, SSYS, CAT, UTX, F, HPQ,
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