Last 12 months haven’t been good for 3D printing companies, especially for Stratasys (SSYS, Financial). The stock has fallen close to 50% and is now trading at just over $50. While the company has failed to reward investors, I think the drop has presented a great opportunity for investors to buy the stock. The company’s has failed to beat analysts’ estimates however investors should remember that the company spend a lot of money on M&A. Moreover, Stratasys has a good reputation of incorporating the mergers into its core business; hence I think the stock is a good buy.
A look at the last quarter
Stratasys reported murky results for fourth quarter 2014. Both top and bottom line fell short on the analysts estimation.
The company’s adjusted earnings estimated by consensus were 41 cents, which were reported 31 cents. Furthermore, adjusted earnings decreased by 20.5% y-o-y.
On the revenue front, the company again fell short of the analyst’s estimate of $218 million. Non-GAAP revenues showed an increment of 40% from previous year quarter to $217.1 million. Amplified revenues were witnessed in both product and service segments.
It has been stated that company’s fourth quarter results were pessimistically impacted by slower revenue growth at its MarketBot business, reason being introduction of its new product and Stratasys’ rapidly evolving distribution model.
Company’s adjusted gross margins tapered 400 bps chiefly due to acquisitions to 55.4% and adjusted operating expenses increased 52.8% y-o-y to $104.2 million. Additionally, operating expenses increased 400 bps y-0-y to 48% as a percentage of revenues. Operating margins were affected by this increase in operating expenses, which constricted 810 bps to 7.4%. In other words company’s operating income was down by 32.6% y-o-y.
Stratasys does not have any long term debts. The company ended the quarter with cash and cash equivalents of $442.1 million against $383.5 million in the last quarter. While, inventories came in at $123.4 million compared with $119.3 million in previous quarter.
The road ahead
The guidance for the year 2015 by Stratasys states non-GAAP earnings per share in between the range of $2.07-$2.24 per share , as expected by the management, while consensus estimation is for $1.84 per share.
Stratasys arrangements to put an extra 2% in operating costs out of the expected 2015 revenues now guided to a midpoint of $950 million. This adds up to about $19 million in extra operating costs for 2015 and regularly higher sums throughout the following couple of years.
The organization activities aggregate costs to achieve the scope of 46% to 47% of revenue. Significant is that Q3 levels were just around 43%, so a 2% expansion may be on the low side. Additionally, Stratasys repeated arrangements to spend between $160 million to $200 million on capital costs in 2015. This contrasts with just $60 million spent in 2014.
Stratasys needs to spend more to keep up an authority position in the market. Indeed, even after the increment in spending, the organization still anticipates that 2015 net pay will surpass 10% of revenue.
Conclusion
For investors who don't fear the section of HP into the division, the stock is modest with a lot of upside. Without a substantial scale contender taking market share, Stratasys and 3D Systems will effortlessly come back to margin extension mode as 2015 plays out. Without margin extension, the stock is most likely fairly priced as of right now exchanging at around 24x 2016 EPS estimates. The capacity of Stratasys to proceed with natural revenue development in the attractive 3-D printing division while returning margins to past levels prompts standardized EPS levels fundamentally higher.
