A Hidden Gem Among the 3D Printers

Pamela is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The stock of Swedish 3D printer Arcam AB  (NASDAQOTH: AMAVF) is up over 400% since the end of last November. Like ExOne (NASDAQ: XONE), it is one of the few additive manufacturers that prints in metals. (Last week, 3D Systems (NYSE: DDD) gained metal printing capability when it closed its purchase of French printer Phenix Systems).

Accelerating sales growth, high gross margin, clean balance sheet, positive free cash flow and relatively low valuation make Arcam an attractive investment.

Most 3D printers seeing accelerating sales growth

Arcam reported year-on-year sales growth of 58.3% for the most recent quarter ended June, more than double its 2012 sales growth of 26.6%.

Sales growth is also accelerating at other 3D printers, including Stratasys (NASDAQ: SSYS) and ExOne. 3D is the exception.

<img alt="" src="http://g.fool.com/editorial/images/60691/sales-growth_html_59f6058b_large.gif" />

A large part of Stratasys's 116% year-on-year sales growth in the March quarter was due to the $1.4 billion merger with Objet last December, doubling its size.

Arcam's gross margin is the highest of the four

Arcam's gross margin consistently exceeds those of the others. Its TTM gross margin was 61.6%, 19% higher than 3D's 51.8% and 48% higher than its most direct competitor, ExOne.

<img alt="" src="http://g.fool.com/editorial/images/60691/gross-margin_html_1bfa766e_large.gif" />

Stratasys's management has said merger costs will continue to adversely impact its gross margin for the near future.

3D's ability to grow its gross margin despite multiple acquisitions is a tribute to its ability to successfully and rapidly integrate its purchases.

ExOne must reduce its cost of goods sold to become profitable. Its gross margin is too low to support its operating expenses. It made progress in the first quarter, increasing its gross margin by 19% year-on-year.

All four companies sport clean balance sheets

Each company has ample operating funds with current ratios well above 2 and at least 15 weeks' cash in terms of sales. All have little or no debt.

<table> <tbody> <tr> <td><strong>Ticker</strong></td> <td><strong>Current Ratio</strong></td> <td><strong>Total Debt to Equity</strong></td> <td><strong>Cash in Weeks of Revenue</strong></td> <td><strong>Goodwill as % of Total Assets</strong></td> </tr> <tr> <td><strong>AMAVF</strong></td> <td><strong>3.6</strong></td> <td><strong>0.00</strong></td> <td><strong>47.6</strong></td> <td><strong>0.0%</strong></td> </tr> <tr> <td><strong>DDD</strong></td> <td><strong>3.1</strong></td> <td><strong>0.10</strong></td> <td><strong>15.2</strong></td> <td><strong>39.8%</strong></td> </tr> <tr> <td><strong>SSYS</strong></td> <td><strong>3.8</strong></td> <td><strong>0.00</strong></td> <td><strong>27.4</strong></td> <td><strong>48.0%</strong></td> </tr> <tr> <td><strong>XONE</strong></td> <td><strong>8.7</strong></td> <td><strong>0.03</strong></td> <td><strong>109.1</strong></td> <td><strong>0.0%</strong></td> </tr> </tbody> </table>

Last quarter, Arcam wisely took advantage of the appreciation in its stock price and issued additional shares bringing in $18.6 million in cash. ExOne's IPO this February, netted it $91.1 million.

There is one red flag in the balance sheets of 3D and Stratasys -- the high percentage of goodwill from acquisitions. A maximum of 20% is desirable. As we will see below, the large amount of intangible assets on their balance sheets severely reduces their book value.

Arcam's FCF as percentage of sales is the highest

Arcam's TTM free cash flow was 17.8% of sales, the highest of the 4 companies. Excluding the cost of acquisitions, 3D's TTM FCF was 11.4% of sales, and the others were negative. ExOne is still not profitable.

Since Stratasys and 3D routinely buy other companies to grow, including acquisition costs in their capex is key to understanding the true cost of their growth.

Although 3D has consistently posted positive CFO ...

<img alt="" src="http://g.fool.com/editorial/images/60691/cfo_html_m7ee87d91_large.gif" />

its FCF is consistently negative when the cost of acquisitions is added to capex.

<img alt="" src="http://g.fool.com/editorial/images/60691/fcf-with-acquis_html_1f434ae_large.gif" />

Stratasys's FCF including acquisitions was positive in 2012 due to $41.5 million in net cash from the Objet merger.

Buying other companies is a very expensive way to grow sales. 3D's TTM Sales divided by capex including acquisitions was just $3.55 vs. $17.84 for ExOne which has not bought anyone.

<img alt="" src="http://g.fool.com/editorial/images/60691/sales-per-capex_html_5d29ce08_large.gif" />

Stratasys's TTM $18.58 is inflated by the $41.5 million in cash from the Objet merger. More typical is its figure for 2011, $3.03.

The TTM figure for Arcam is missing because its TTM capex was positive, meaning it spent zero on capex. Since I could not calculate its TTM sales per capex, I've provided figures for 2012.

Arcam's model is very different from the others. Because it outsources its manufacturing, its capex consists mainly of equipment purchased for R&D. That's why its sales per capex is so high.

Arcam's valuation is the most attractive

Since ExOne is not profitable, I used Price/Sales (P/S) instead of P/E. Arcam is three times cheaper than ExOne on this basis.

<table> <tbody> <tr> <td><strong>Ticker</strong></td> <td><strong>Market Cap (Millions of USD)</strong></td> <td><strong>TTM Sales (Millions of USD)</strong></td> <td><strong>Price/Sales</strong></td> <td><strong>Price/Book Value</strong></td> </tr> <tr> <td><strong>AMAVF</strong></td> <td><strong>$233</strong></td> <td><strong>$28</strong></td> <td><strong>8.3</strong></td> <td><strong>7.3</strong></td> </tr> <tr> <td><strong>DDD</strong></td> <td><strong>$4,387</strong></td> <td><strong>$378</strong></td> <td><strong>11.6</strong></td> <td><strong>32.9</strong></td> </tr> <tr> <td><strong>SSYS</strong></td> <td><strong>$3,475</strong></td> <td><strong>$268</strong></td> <td><strong>13.0</strong></td> <td><strong>14.1</strong></td> </tr> <tr> <td><strong>XONE</strong></td> <td><strong>$872</strong></td> <td><strong>$34</strong></td> <td><strong>25.7</strong></td> <td><strong>10.2</strong></td> </tr> </tbody> </table>

I included Price/Book Value to illustrate the impact of high goodwill and other intangibles from acquisitions. Although 3D's market cap is $4.4 billion, its book value is only $133.5 million -- just 4 times Arcam's.

None of these companies is cheap, but Arcam is the least expensive on both a P/S and P/B basis. (Note: Prices are as of the close on July 22.)

Many equity investors ignore P/B, but lenders don't. That is why 3D pays 5.5% on its debt. Google with a P/B of 5.2, pays just an average of just 1.3%.

Bottom line

Of these four additive manufacturers, Arcam is the best buy. Sales are growing rapidly. Its gross margin and FCF as a percentage of sales are the highest. The balance sheet is clean and it has plenty of cash. Though not cheap with a P/S of 8.3, it is the least expensive of these 4 additive manufacturers. For those interested in owning a piece of a 3D printer printing in metals, Arcam is a much cheaper alternative to ExOne or 3D.

One caveat -- Arcam is thinly traded in the US. Average daily volume is about 5,100 shares vs. 655,000 for ExOne and 4,664,000 for 3D. Investors should factor this in when deciding on how much to buy.

For a more in-depth look at these 4 companies, please visit my personal blog.

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Fool contributor Pamela Peerce-Landers owns shares of Stratasys. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short January 2014 $36 calls on 3D Systems and short January 2014 $20 puts on 3D Systems. 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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