3D Printers are machines that can print almost anything and are transforming industries in the last ten to fifteen years. There is a constant shift to manufacturing processes using 3D content-to-print solutions. Using 3D printing, the companies feel free to create and manufacture customized products and not necessary at higher costs.
In the attempt to grow its business, the firm accelerates 3D printer penetration, through channel expansion and new products. This market leader has a research and development program to develop new printers and print materials.Italso looks to enhance product lines to improve and expand the capabilities of its portfolio.Moreover, the company focuses on grow healthcare solutions revenue, build 3D consumer content products and services, and integrate 3D authoring solutions.
The company continues to expand metal manufacturing capacity and has plans for a larger build size, faster production printer to be released by year end. Among other things, the firm announced it has shipped over two dozen of its ProXTM Series Direct Metal printers to a number of automotive tyre manufacturers.
Further, acquisition activity in this area in order to expand vertical integrationis still an option. It has completedmore than 35 acquisitions since the start of 2009. Recently, the company announced its strategic deal with Konica Minolta to distribute its complete 3D printing product portfolio.
Canalys, an independent analyst company that strives to guide clients on the future of the technology industry, estimated the size of the market. It estimated that including 3D printer sales, materials and associated services, the market reached US$2.5 billion globally last year.It predicts that the market will rise to US$3.8 billion in 2014 and will reach US$16.2 billion by 2018. This represents an expected compound annual growth rate (CAGR) of 45.7% from 2013 to 2018 which seems absolutely attractive for investors.
Relative Valuation, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 121x, trading at a premium compared to an average of 55x for the industry, which indicates that the company is relatively overvalued. Some of its major competitors include Stratasys Ltd. (SSYS), Mentor Graphics Corp. (MENT), and Flir Systems, Inc. (FLIR). The following table compares the current valuations:
3D SYSTEMS CORP
MENTOR GRAPHICS CORP
FLIR SYSTEMS INC
Consider that 3D Systems trades for 121 times trailing earnings, Mentor Graphics trades at a P/E of 16 and Flir Systems at a 28 P/E. Comps look more attractively valued looking back the trailing ratio.
With respect to earnings per share, 3D Systems has decreased them by 16.67% (from 6 cents to 5 cents) in the first quarter compared to the same quarter a year ago, disappointing by 3 cents the analysts’ consensus estimate.
If a company maintains more than 10% EPS growth rate, that company may be a good target. In our case, 3D is offering a 25.5% CAGR which we think is pretty good and should attract investors.
Comparing actual earnings to analyst estimates is also helpful because an earnings surprise can move a company’s stock price.
In the next chart we can appreciate a very interesting upward trend in the last five years.Year to date, 3D's stock has been on a steady decline, but it has made a strong rally since mid-June and the stock has gained 26% (principally because of the takeover speculation).
According to The Financial Times, the 19 analysts offering 12 month price targets for 3D Systems have a median target of 67.00, with a high estimate of 84.00 and a low estimate of 45.00. The median estimate represents an11.67% increase from the last price seen of 60.00.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weaknesses within the company.
Let´s compare the current ratio with the peer group in the next table:
3D SYSTEMS CORP
MENTOR GRAPHICS CORP
FLIR SYSTEMS INC
3D Systemshas aratio of 5.8% which is higher than Stratasys, but is lower than the industry-mean (7.33%) and the ones registered by Mentor Graphics and Flir Systems.
The 3D printing industry is characterized by rapid technological change. Expanding distribution channels and exploring new markets is an excellent way to increase sales of existing products. We are convinced about a greater adoption of its product offeringsin the near future and growth potential in the 3D printer space, focusing on developing 3D printing solutions to the aerospace, automotive, health care, education, architecture and consumer marketplaces.
According to the P/E ratio, the stock is overvalued but companies that show a consistent growth in earnings make attractive investment candidates for stock investors. Additionally, we checked revenue growth to ensure that earnings growth is not coming from special situations like sale of assets. Because the stock market is forward looking, stock prices are established based on the expectations that investors have for the future earnings power of the firm. A proxy for the market’s expectations is analysts’ consensus earnings estimates which we see are starting to increase their predictions in the upcoming future. Its stock price performance growth over the past five years was the highest between peers and actual price levels maybe indicating a good buy at this moment.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the first quarter of 2014. Gurus like Steven Cohen (Trades, Portfolio) and Chase Coleman (Trades, Portfolio) have taken long positions on it.
Disclosure: Omar Venerio holds no position in any stocks mentioned