Innovative Technology Leads 21st Century Manufacturing
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Manufacturing is usually thought of by most investors as a dull, stodgy, slow growth, low profits sector that is best avoided. But if investors assume that to be true, they will be missing out on an exciting new sector of manufacturing, one that uses the latest technologies and which promises to increase manufacturing precision while lowering costs by billions of dollars for manufacturers worldwide.
That sector is high-tech additive or personalized manufacturing, otherwise known as 3D printing. 3D printing was invented in 1984 by Charles Hull. Such machines are based on the latest advances in electronics, laser technology and chemistry whose purpose is to build up complex shapes from granules of plastics or metals. The technology has exploded in recent years, having been used to build everything ranging from car bodies to dental implants to jet engines to jewelry to transducers for ultrasound scanners.
Two of the early users of 3D printing technology are global industrial powerhouses, General Electric (NYSE: GE) and ABB Ltd. (NYSE: ABB). GE's CEO Jeff Immelt was recently quoted in a Financial Times article about 3D printing as saying “It's going to be big” as he pointed out how this new exciting area of manufacturing will shorten cycle times between designing products and actually making them. ABB's CEO Joe Hogan said in the same article “3D printing means it's possible to go from concept to reality in just a few hours. That's a big help when you are trying to be quicker and more reactive.”
The Economist backed up both CEOs, citing that 20% of all output from 3D printers is currently producing final products rather than prototypes. It went on to say that, by 2020, that figure will rise to more than 50 percent.
This technology also lowers the amount of infrastructure needed for manufacturing, allowing emerging companies and countries to become a serious player in manufacturing much more easily and quickly. And in developed countries, it will allow mass personalization of goods, perhaps marking the return of artisan production workers which haven't been seen in most rich nations for many decades.
Investors may be curious as to who the current leaders are in this new technology. Additive manufacturing machines are being made by a number of companies around the world such as Germany's EOS, the UK's Renishaw and Sweden's Arcam along with several firms right here in the US. These companies include the likes of Stratasys (NASDAQ: SSYS) and 3D Systems (NYSE: DDD).
The key here for investors is that this is an industry still in its infancy. Industry figures put sales of 3D printing equipment last year at only about $500 million. This is less than 1% of sales of conventional machine tools. Total revenues for the entire industry, including materials and services, amounted to about $1.7 billion in 2011. But it is a fast-growth technology industry.....
That is why, as institutional investors have caught on, that both 3D Systems and Stratasys are both selling at about 35 times this year's earnings. Another reason for their valuation level is the possibility of a takeover by a large company like GE or Hewlett-Packard (NYSE: HPQ), the largest printer company in the world.
Hewlett-Packard, which signed a collaboration agreement with Stratasys in 2010, may not want to follow the path Kodak took. Kodak was the dominant player in photography, but missed out on the digital camera revolution and become an obsolete company. HP likely does not want to miss out on this revolution and may just buy one of the main players in the sector.
What is the bottom line for investors? This 3D printing technology will most likely be more disruptive than expected and become a gold mine for those companies in this field. The stocks of these companies should turn out to be bargains for those who hold on to the shares for years down the road.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of ABB and 3D Systems and has the following options: short AUG 2012 $30.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems, ABB, 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.