Proto Labs: The Ignored Rapid Prototyper

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While the whole market is going crazy over 3D printing and rapid prototyping technologies, Proto Labs (NYSE: PRLB) remains a relatively unknown equity. The stock regularly trades fewer than 100,000 shares in a day, while sector leaders 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) regularly trade over 1M shares in a day.

The company is a leading online and technology-enabled quick-turn manufacturer. Its motto is “Real Parts, Real Fast” for product developers worldwide. If a customer needs an injection-molded part the next day, the company can provide it at lower cost than traditional production methods. Once a part is tested and approved, Proto Labs can provide tooling for parts needed in marketing and pilot production.

Does the stock provide a value, considering investors don’t trade it as regularly as its better-known brethren?

Strong earnings absent mergers

One of the biggest negatives with the sector has been the rapid merger machine of 3D Systems and the major recent deal by Stratasys. With 3D Systems' acquisitions occurring faster than the company’s printers can print designs, several analysts have challenged the company's organic growth rate. In fact, 3D Systems announced a deal for Geomagic as this article was being researched.

On the other hand, Stratasys finalized a mega-merger that saw the company nearly double in size. The deal helped propel the stock higher in 2012 due to the highly accretive earnings expectations. The integration of a mega-merger can be very tricky with expectations constantly missed.

Next year, analysts expect Proto Labs to grow revenue by 22% and earnings 25%. The company lacks the integration risks amongst other issues with mergers as well. The cleaner numbers could make the stock more appealing to investors.

Huge margins

Proto Labs reported solid earnings for Q3 2012, with 21% revenue growth over 2011. The nine-month growth was at 26% indicating a slowing growth rate that investors will want to track next year.

The impressive part about this stock and the general sector is that Proto Labs has massive margins. The gross margins came in at 61%, while the net income margins hit over 20%. The company already pays around 33% in income taxes, so that isn’t skewing the numbers as it might at many typical start-up technology stocks.

Follow-on offering

As with the other stocks in the general sector, investors are wise to buy the dips as these stocks remain very volatile. Proto Labs completed a follow-on offering in November of over 4 million shares, mostly from existing shareholders. The deal priced at $31, and was an opportune time to enter the stock, considering it hit $40 last week.

The stock traded down to almost $31 on the days before and after the offering priced on Nov. 15. The stock has quickly soared into the $38 range on the backing of a strong Q3 earnings report and sector demand. As with most stocks, investors should expect the unexpected events and use that for entry points into favorite stocks. The stock has now bounced from the $28 to $38 range multiple times.

Stock price/valuation

While the stock gets significantly less media attention and trading volumes, the valuation is only slightly more appealing. Currently, investors are willing to pay nearly 30 times next year's earnings estimates. That's definitely not a cheap valuation, but in line with estimates for five-year growth of close to that multiple.

The stock does trade at cheaper multiples than 3D Systems and Stratasys, so the lack of attention is an advantage. Unfortunately, it's not the huge bargain one might think.

Conclusion

Any investors interested in long-term positions in the sector should probably look to enter Proto Labs on any stock or market-related weakness. The company offers a more compelling valuation as well as less merger integration risks. All of the stocks in the sector have had sell-offs in the past year, so investors should grab the next one instead of chasing the current price. No doubt exists that the future of rapid prototyping will be strong, but price does matter.


Mark Holder and Stone Fox Capital Advisors, LLC have no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short JAN 2014 $55.00 calls on 3D Systems and short JAN 2014 $30.00 puts on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Proto Labs, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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