Any Growth Investor Should Consider This Stock
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stratasys (NASDAQ: SSYS), the leading manufacturer of in-office rapid prototyping (RP) systems is not only growing fast, but also keeping market share and freezing prices on the roof. And guess what? It just reported earnings. Lets take a look at the market and the company.
A Market Going From Good to Great.
The 3D sector is growing rapidly. Stratasys and its main competitor, 3D Systems (NYSE: DDD) have far outperformed other manufacturing technology stocks YTD (they are up 122% and 214% respectively), but amazing stock performance should not surprise anyone. Wohlers Associates estimates that the 3D printing market grew 29.4% in 2011, with a 26.4% CAGR over the 24-year period ending in 2011. But high growth is just a part of the story since the market is already big, in absolute terms: the 3D printing market reached $1.7 billion in 2011 sales; when putting future growth estimate numbers to work, Wohlers Associates estimates the industry’s addressable market will total $3.7 billion by 2015 and $6.5 billion by 2019.
But not all the growth is expected to come from the profitable professional market since even when the consumer market remains small in terms of sales (as the average selling price per unit is so low), this portion of the market is booming, and on a unit basis, is far larger than the professional grade industrial printers that form the majority of total industry revenue so far. Apparently, good news now shall become better and better going forward.
From SSYS's standpoint the future also looks bright since, even though the competitive landscape is intensifying (31 professional grade systems manufacturers participate in the market as of 2012), the majority of revenues come from a very narrow collection of participants and we see this concentration is here to stay given that main players are not interested in price wars and they are basing competition on other far less replicable aspects of the business.
The pricing power in place (since neither 3D Systems nor Stratasys have lost market share through keeping prices high) comes from two key advantages:
Their high quality service capability - which is a real edge for 3D in particular.
Their strong re-seller network – Stratasys appears to have an advantage over the whole collection of competitors on this specific front. Stratasys' global network of resellers and agents has played significant roles in the growth of the company's market share especially in key areas such as North America, South America, Europe & Asia where demand growth for such technologies is at its peak. The key in the continuous growth and expansion of the firm's selling points has been its acquisition appetite. Solidscape's acquisition for $39.1 million last year could be a clear example of success in this front.
A Snapshot of Results
To be fair lets highlight some results achieved:
a) The company just reported revenue of 144.1 million for the nine-month period ended September 30, 2012, a 28% increase from the 112.3 million reported for the same period last year. Good keeps getting better.
b) System shipments totaled 911 units for the third quarter of 2012, a stunning 52% increase.
c) In 2011, the company earned 22.51 million from its operations for a Cash Flow Margin of 14.44%. This number is set to improve for 2012.
d) Stratasys uses little or no debt in its capital structure and will continue to do so; thus, the +12% ROE that you see is all true healthy performance.
Good or Even Great is Not Enough.
All the above said, finding a good company in a growing market with efficient management makes only a part of a good investment case. The remaining chapter in successful investing is entry price because everything has a price and a big entry ticket can jeopardize years of investment performance. There is a good article from the blog Warren Trades that explains this.
Trading at a multiple of 75x P/E and with its $1.5 billion market capitalization, Stratasys could already be fairly priced – or even more than fairly priced; $67.50 per share , in our opinion, reflects its huge earning power potential in the always changing high tech market – of course when we say 'always changing' we are stressing the risks associated to an industry where a technological breakthrough by a competitor that could change the game entirely is always in the cards.
After all, there is a right price for everything and we feel that the value that you get is not greater than the plus sixty seven dollars you give going long on Stratasys.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems and has the following options: short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems 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.If you have questions about this post or the Fool’s blog network, click here for information.