A Diamond in the Rough

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

The computer hardware business has been in a state of flux for a number of years, as customers have flocked to mobile devices and software applications have migrated toward cloud computing.  The speed and cost savings of the online world have been great for customers, but not so good for the big computer and printer manufacturers, including Hewlett-Packard (NYSE: HPQ), Dell (NASDAQ: DELL), and Lexmark International (NYSE: LXK).  The three competitors, each a former growth story, have reported sales declines of between 9% and 11% in their hardware businesses in 2012 and all have attempted to increase their services businesses through the acquisition channel.  Lexmark, the smallest of three, even decided to exit the inkjet hardware business with the initiation of their latest restructuring plan in August.  Yet, they all seem to have missed a growth story in the printing business.

Living in 3D

While computer aided design (CAD) has been around for a number of years, 3D printing is a more recent phenomenon that is growing fast.  Founded in 1986, 3D Systems (NYSE: DDD) is an industry leader and holds the patent for stereolithography, the process of creating solid objects by building successive layers of curable material through the use of lasers.  The company’s printers can create objects in as little time as one day, benefiting customers with cost savings and improved efficiency compared to traditional methods.  While industry sales were historically limited to certain manufacturing segments, sales of the printers to the larger education and healthcare markets has led to significant growth over the past few years.

In its latest fiscal year, 3D reported revenues and operating income of $230.4 million and $34.9 million, increases of 44.1% and 66.8%, respectively, over the prior year period.  Both gross and operating margins improved to their highest level of the past five years as the company gained operating efficiencies from its higher sales base.  3D achieved its growth through both acquisitions, including 12 purchases in 2011, and an increase in sales volumes.  Average prices for its printer products declined 6.4% versus the prior year, as the company continued to pursue new markets at lower starting price points.  The company is also aggressively building its parts and services business, which accounted for 71% of total sales in FY2011.  Since 2009, it has acquired 12 service providers across its global base of operations, which fill on-demand orders from customers who don’t have the current need or resources to purchase a system.

Looking Ahead

In FY2012, 3D Systems has continued to report strong financial results, with increases in revenues and operating income of 57.0% and 75.2%, respectively, over the prior year period.  While there are some concerns over its acquisition-heavy strategy, the company’s operating margins continue to improve and cash generated from operating activities rose to $44.0 million for the period.  3D’s recent purchases of competitors have continued to focus on the services and software parts of its business, which the company hopes will drive more purchases of its printers.  In addition, the January 2012 launch of its home printer product, the Cube, should open up the larger consumer market to the company and support future growth.

Waiting for Validation

Investors are expecting significant growth from the 3D printing industry, valuing 3D Systems at a 51 P/E multiple based on recent prices.  It now has almost twice the market cap of Lexmark International, a company that could have bought it for much less a few years ago.  While 3D’s worldwide market opportunity is certainly large, investors need to wait for validation of the company’s ability to reach the consumer segment at an affordable price level.  When its products finally reach the shelves of the major office supply merchandisers, wide acceptance of its products will be complete.  Until then, wait for a pullback before making an allocation to this rising star.


rghanley has a long position in 3D Systems. The Motley Fool owns shares of 3D Systems 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. 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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