|3D Systems: More Attractive After The Sell Off |
by: Stone Fox Capital
October 10, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The 3D printing sector has appealing growth potential, but the valuations of the two main players got to very expensive levels. The stocks of 3D Systems ( DDD) and Stratasys, Inc. ( SSYS) were expensive in spite of the fast growth rates.
The company is a leading provider of 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and consumers alike.
Now after a decent selloff plus the announcement of a solidly accretive deal, 3D Systems has become a much more attractive stock. The stock actually is in a similar price range as the previous article in July that questioned the valuation. The difference now is that the company has grown for three more months and spent a nice portion of the secondary funds to reduce the dilution impact moving beyond Q3.
On Tuesday, the company announced the acquisition of Rapidform, a leading global provider of proprietary 3D Scan-To-CAD software tools located in South Korea. The company provides leading 3D scan data processing software tools for reverse engineering and inspection. It has 35 patents with over 6,500 customers globally.
The more exciting part of the deal is that the $35M purchase price will add $15M to the 2013 revenue base. On top of that, the deal will add $0.06 to $0.09 to earnings.
Buying a private company for cash at just over 2x revenue is very attractive especially considering the market values the current revenue at 4x 2013 estimates.
Back in June, the company raised roughly $107M in order to finance future acquisitions such as the Rapidform deal. As of the end of Q2, the company had $159M in cash. Below is a list of the acquisitions announced since the end of Q2:
On October 1st, the company acquired Tim The Innovative Modelmakers B.V. to expand on-demand parts services in Benelux and for European customers in general. No details were provided on the financials.
On July 23rd, the company acquired Viztu Technologies to expand the phone capture and play simplicity of Cubify. Vitztu developed the Hypr3D, an online platform that allows anyone to turn pictures and videos into printable 3D creations. No details were provided on the financials.
Another reason for becoming more bullish on this stock over Stratasys is the general belief that tuck in deals are easier to complete and more successful. Stratasys is still working to finalize the Objet merger announced back in April. See the article on the delays here. After finalizing that deal, the company will need to integrate two different cultures to make a cohesive team.
As mentioned in the Q2 earnings preview, a big concern with 3D Systems at the time was the unpredictable earnings reports. The company had a history of solidly beating or just meeting estimates.
The Q2 numbers came in right at the expectations of $0.27. This makes three out of the last four earnings reports at or below estimates. Typically hot momentum stocks continuously beat and raise estimates, but this company hasn't had a history of such results.
Analysts expect Q3 numbers to be flat from Q2, partially due to the dilutive secondary completed at the end of June. The key going forward after pushing beyond Q3 is that earnings for 2013 have started climbing higher going from $1.33 90 days ago to $1.38 currently. Even better, the Rapidform deal just added up to another $0.09 to those estimates. Numbers could easily approach $1.50 now.
The company reports Q3 on October 25th providing investors a couple of weeks to decide whether to buy before or after the earnings report.
The stock currently trades at $34, approaching the lows for the last month. It now only trades at 22x expected updated 2013 earnings. After a huge run by Stratasys this last year, 3D Systems appears to be the better deal in the sector.
DDD Total Return Price data by YCharts
3D Systems provides a compelling buying opportunity around the current price. The stock valuation has become cheaper over the last few months as earnings expectations have expanded while the stock has pulled back. The company though tends to have spotty results and the dilutive nature of the secondary probably held back any earnings gains in Q3.
Now that the company has made several acquisitions to absorb the cash, the forward guidance is likely to be attractive. Anybody interested might be best served by purchasing a half position before the earnings report, leaving some cash for disruption in the earnings. The real key will be to scoop up shares for the growth acceleration next year.
Additional disclosure: Please consult your financial advisor before making any investment decisions.