Two Technologies Changing Construction
Wes is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Technology in the construction industry keeps on changing. Just a few years ago additive manufacturing was only in our imaginations, and now we can print everything from auto parts to body parts. Erikson Air-Crane (NASDAQ: EAC) is a small market cap company at $250 million. This specialized company uses its heavy duty helicopters to do everything from fight fires from the sky to raising beams for skyscrapers and bridges. This specialty company just came public, and is serving a niche market in the construction industry that’s dominated by companies like Caterpillar.
Going where no crane has gone before
Founded 40 years ago as part of the logging industry, Erickson evolved into a company that has over 100 heavy duty helicopters. These are very versatile choppers that can be fitted for extreme construction, or fighting wildfires in California. They have the capability to refill a 2,650 gallon water tank in 45 seconds (the equivalent of three fire engines) and can spray 300 gallons per minute at a range of 200 feet.
Brazil’s Petrobras just recently signed a two year contract with Erikson to service their offshore rigs. Offshore oil rigs are in constant need of supplies, and the best way to send them is via helicopter. Erikson's South American exposure to the oil and natural gas fields will be a boon to both Erickson and oil companies. Petrobras, for example, will no longer have to wait for supplies by boat.
This year, Erickson completed a 3 year, 117 mile power line project that brings renewable solar energy into the city of San Diego. This was completed without the large environmental impact of bringing large cherry picker trucks through a forest to set up the lines. Erickson has long term contracts for over 65 helicopters year round, and is in the planning stages to build 15 more.
Erickson is completely vertically integrated. It designs and builds its helicopters in-house as a US company. Erickson's debt position is a little heavy, and it has recently entered into a new $100 million, five-year revolving credit facility. Erickson has over $400 million in debt that it used to construct more helicopters and propel earnings higher. Last year, the company had revenue growth of 33.8%.
This company has been able to defend its moat and secure margins of over 35%. Erickson will be able to maintain these margins, as they are able to better control their costs than anyone else looking to break into the helicopter construction business. As an investor, very little competition is something to celebrate.
The 3D printing space is dominated by the two largest players, Stratasys (NASDAQ: SSYS) and 3D Systems (NYSE: DDD). 3D Systems stands at $4.5 billion in market cap, while Stratasys is slightly smaller at $3.6 billion. Both of these giants in the industry are competing for corporate and consumer 3D printing market share, but their valuations are anything but two-dimensional.
These two players have been snatching up the smaller players and patent holders in the 3D space for the past few years to emerge as the largest stand-alone 3D printing companies. Both companies boast a gross operating margin near 20%, and are in a rapidly growing space.
Stratasys and 3D Systems get a little tricky to compare against one another. Stratasys has been actively writing down its intangible assets, and this has led to some very large discrepancies in reconciling GAAP to Non-GAAP earnings. If investors were to ignore the Object acquisition write downs, the company would have earned nearly $1.50 instead of a $(0.58) loss per share in 2012. That kind of accounting and measurement makes me nervous as an investor.
The price to earnings multiple using Stratasys’ non-GAAP earnings would yield a PE of 52, vs a PE of nearly 100 for competitor 3D Systems. But due to the write down, it is very difficult to compare the PE’s of the two companies.
Markets for growth
General Electric is now able to print out in a get engine fuel nozzle that is 25% lighter and potentially five times more durable than the current conventionally made nozzle, which is made from 20 different parts. It is such a radically different design that GE engineers had to develop a new quality control measure before these new products could go to the mass market. These new nozzles could shave off nearly 25% of the cost and time used vs. conventional methods. It’s applications like these that make the 3D printing business so enticing.
Foolish Bottom Line
All three of these companies are small right now, but they all play especially well to their respective niches. The odds of Stratasys or 3D Systems getting picked up by an international conglomerate like GE or Siemens is not too far out, either. Eriksons will continue to be the preeminent air construction company with the limited size of that market. Both 3D and Stratasys are the best players in their game right now, and have acquired a sizable number of their competitors. These companies are riding the wave of a manufacturing revolution, but at these valuations, it’s bound to be a bumpy ride.
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Wes Patoka owns shares of Stratasys. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short January 01 2014 $36 calls on 3D Systems and short January 01 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!