3D Systems Corporation

Transcription

1 January 07, D Systems Corporation Current Recommendation Prior Recommendation Underperform Date of Last Change 04/29/2014 Current Price (01/06/15) $30.15 Target Price $32.00 NEUTRAL (DDD-NYSE) SUMMARY 3D Systems reported robust third-quarter results thanks to increased adaptability of 3D printed solutions. However, earnings were affected by the manufacturing limitations faced by the company s metal printer division. Nevertheless, over the long term, the company is likely to reap the benefits of its product launches and global expansion. Also, the recent acquisition of Robtec bodes well for the company s growth. However, increased R&D costs along with the severely competitive nature of the industry remain matters of concern. Hence, we have maintained our Neutral recommendation on 3D Systems. SUMMARY DATA 52-Week High $ Week Low $28.38 One-Year Return (%) Beta 2.15 Average Daily Volume (sh) 2,705,672 Shares Outstanding (mil) 111 Market Capitalization ($mil) $3,347 Short Interest Ratio (days) Institutional Ownership (%) 49 Insider Ownership (%) 7 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 45.7 Earnings Per Share (%) 66.4 Dividend (%) N/A P/E using TTM EPS 53.8 P/E using 2015 Estimate 35.5 P/E using 2016 Estimate 24.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Mid-Blend Industry Comp-Mini Zacks Industry Rank * 32 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 121 A 136 A 155 A 514 A A 152 A 167 A 211 E 678 E E 206 E 222 E 263 E 890 E ,121 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.18 A $0.18 A $0.24 A $0.16 A $0.76 A 2014 $0.11 A $0.11 A $0.18 A $0.20 E $0.60 E 2015 $0.16 E $0.17 E $0.23 E $0.29 E $0.85 E 2016 $1.22 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Rock Hill, SC, 3D Systems Corp. is a leading provider of 3D content-to-print solutions including 3D printers, print materials, on-demand custom parts services and 3D authoring solutions for professionals and consumers, worldwide. The company also provides scanners for a variety of medical and mechanical X-Ray film digital archiving. The company s primary print engines comprise stereolithography, selective laser sintering, multi-jet modeling, film transfer imaging, selective laser melting and plastic jet printers, as well as ZPrinters. Its 3D printers convert data input from computer aided design (CAD) software or 3D scanning and sculpting devices to produce physical objects from engineered plastic, metal and composite print materials. 3D Systems primarily caters to a broad range of industries including manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer, energy and healthcare products, as well as original equipment manufacturers, government agencies, universities, independent service bureaus and individual consumers. 3D Systems pursues a growth strategy that essentially focuses on five strategic initiatives: Expand Quickparts Services: As a supplement to its 3D printer solutions, the company maintains a global network of parts printing service locations branded as Quickparts, which are designed to provide customers a single source for all their design-to-manufacturing needs. 3D Systems believes growing and expanding its Quickparts services, through organic growth and acquisitions, will enable it to customers to the newest 3D additive production technologies, thereby building its brand and customer loyalty. Accelerate 3D Printer Penetration: 3D Systems intends accelerating its 3D printer penetration through channel expansion, new products and enhanced 3D printing materials, so as to generate higher revenue from recurring sales of print materials and services. Therefore, the company has developed an extensive portfolio of 3D printers and continuously expands its reseller channel for printers and trains resellers to perform installation and services for those printers. In 2013, revenue from the sale of printers was $207.1 million or 40.3% of the company s total revenue. Boost Healthcare Solutions Revenue: By leveraging the company s core competencies in healthcare solutions applications and expanding into new applications, 3D Systems intends to generate higher revenue within this highly potential marketplace. Healthcare solutions revenue includes the related sales of printers, print materials and services for hearing aid, dental, medical device and other health-related applications. In 2013, healthcare revenue was $71.7 million, or 14.0% of the company s total revenue. Build 3D Consumer and Retail Products and Services: 3D Systems wants to make its consumer printers more affordable for increased adoption. 3D Systems intends to build this capability through a combination of internal developments and acquisitions. In 2013, consumer solutions revenue was $34.8 million, or 6.8% of total revenue. Reimagine the Engineer s Desktop. 3D Systems intends providing an integrated 3D authoring solutions platform, including software, perceptual devices and tools to combine, capture, mesh, surface, model and measure, so as to be able to continue to expand the applications and utilization of 3D printing. This process is expected to aid seamless integration throughout the design and manufacturing processes. In 2013, software revenue was $20.6 million, or 4.0% of total revenue. Equity Research DDD Page 2

3 REASONS TO BUY 3D printing market is booming and is expected to become a viable alternative across several market segments. According to the analytics firm Canalys, the 3D printing market will grow to $16.2 billion by IDC expects worldwide 3D printer unit sales and installed base to grow at a combined compound annual growth rate of 59% through Being the industry leader in 3D printing, 3D Systems is well positioned to capitalize on the favorable market conditions, as the company has the ability and expertise to gain market shares. 3D Systems has been executing strategic acquisitions to diversify its offerings and expand its operating markets. The company expects its portfolio of new and innovative products to lead to more than 30% organic growth in the next couple of years, thereby, enhancing its margins and earnings. Since 2012, 3D Systems has acquired approximately 22 companies including Medical Modeling and Robotec. Through the recent takeover of Robtec, 3D Systems has strategized to strengthen its local additive manufacturing service bureau capabilities along with gaining a firm foothold in Latin America. The company plans to achieve this by creating a key sales and service platform to drive accelerated adoption of its entire range of design-to-manufacturing solutions. Also, most recently, the company collaborated with The Culinary Institute of America for development of the 3D printing technologies for production of edible food offerings. Such initiatives promise strong growth prospects. 3D Systems has been undertaking strategic initiatives to take 3D printing to a completely new level by expanding its reach and adaptability across various industries. The company plans to extend its desktop design and prototyping reach by delivering more affordable solutions and offerings to engineers, students, entrepreneurs and home users. In its attempt to enhance reach, the company has formed strategic alliances with leading companies across various industries such as chocolates, toys and retail. Encouragingly, the company has already secured its place in sectors like manufacturing, medical, aerospace, while also pursuing unconventional sectors like food and fashion. Further, 3D Systems has been expanding its operation processes to meet the increasing demand. In the reported quarter, the company included another manufacturing line in its processes to expedite its production of metal printers. These direct metal printers are primarily used in design and manufacturing companies. 3D Systems has been witnessing significant demand for direct metal printers and has experienced more than double-fold growth in this business line since its acquisition three quarters back. Further, the company expects direct metal printers demand to increase fourfold, going forward. REASONS TO SELL Although the acquisition spree of 3D Systems holds good for long term growth, it raises debts in the near term. Thus, the lack of strong cash flow could severely dent the financials of 3D Systems in case of any credit market change or interest rate fluctuation. Further, the buyouts made by the company may not deliver desired results which could also pressurize the financials and hamper the business model of the company. 3D Systems is exposed to considerable foreign currency risks as it invoiced over 40% of its sales outside the U.S. in the reported quarter. Furthermore, macroeconomic factors such as economic slowdown, inflation, commodity prices and credit availability are expected to impact the company s performance. Unexpected changes in laws, regulations and policies of foreign governments relating Equity Research DDD Page 3

4 to investments and operations are also likely to impede growth and disrupt the company s operations. 3D Systems operates in a highly competitive industry with its chief competitors being the firms that manufacture or use machines to make models, prototypes, molds and small-volume to mediumvolume manufacturing parts. These industry players include suppliers of CNC, dealers of plastics molding equipment, including injection-molding equipment, suppliers of traditional machining, milling and grinding equipment, and businesses that use such equipment to produce models, prototypes, molds and small-volume to medium-volume manufacturing parts. These conventional machining, plastic molding and metal casting techniques are the most common methods of manufacturing plastic and metal parts, models, functional prototypes and metal tool inserts. 3D Systems operates in an industry which is extremely dynamic in nature and incurs high research & development (R&D) costs. The company s business faces the adverse effects of rapid technological change, alterations in user and customer requirements and preferences, new product and service introductions requiring new technologies, and the emergence of new standards and practices. RECENT NEWS 3D Systems Buys botobjects, Unveils CubePro C Printers Jan 5, D Systems recently announced its latest acquisition, botobjects, a U.K-based 3D printer startup. The company expects the acquisition to be accretive to its business in 2015 itself. However, financial terms of the deal were kept under wraps. botobjects is a pioneer in the designing and development of the 3D desktop printer range, ProDesk3D. The core technology utilized in these printers for the production of true full-color 3D printed objects is the PlasticJet Printing (PJP). The company has formulated the useful 5-color CMYKW cartridge system in order to create diverse color combinations for its 3D printers in a smooth and efficient way. botobjects ProDesk3D technology will be integrated with 3D Systems business on an immediate basis. 3D Systems will, thereafter, leverage botobjects' technology to launch a novel full color desktop printer, CubePro C. The company asserts that CubePro C will set high standards for accuracy and speed in the 3D desktop market and that too, in an economical price range. 3D Systems claims that CubePro C can print as many as 25-microns layers at a high speed of approximately 175 millimeters per second. The printer uses hardwearing print materials like PLA and ABS with PVA support material. The CubePro C will significantly enhance 3D Systems printer portfolio, which consists of 3D printers like CubePro and Cube along with 3D scanning products such as Sense. These solutions are designed by the company keeping in mind the requirements of diverse consumers, ranging from professionals like engineers, designers and architects to common people using the technology for home or school. On the other hand, this acquisition brings a new lease of life for botobjects, which has been facing severe problems regarding the scaling of the production process. Of late, botobjects has been witnessing increased customer dissatisfaction due to its inability to meet demand. 3D Systems stated that it plans to fulfill botobjects back-order for the ProDesk3D printers. CubePro C, which will be showcased at The International CES event, will now be available in limited numbers. However, the company plans to ramp up its production facility in 2015 itself to expand its distribution. Equity Research DDD Page 4

5 3D Systems Partners with Culinary Institute of America Dec 30, D Systems partnered with The Culinary Institute of America ( CIA ) for developing the 3D printing technologies for food and culinary industries. The two entities will be collaborating to initiate a beta program for ChefJet Pro culinary 3D printer that was unveiled in Jan D printing is a novel concept which is now gaining popularity across all domains from manufacturing to medical sciences and presently, to food as well. 3D Systems, a bellwether in the industry, has been making persistent efforts to expand its market share in this vast arena by developing innovative offerings. Recently, the company collaborated with The Hershey Company to explore and develop ingenious 3D printed chocolates as well as non-chocolate products. As per media reports, the two companies exhibited 3D Chocolate Candy Printing at the Hershey s Chocolate World a few days back. The aforementioned partnership with CIA is aimed at enhancement of the conventional culinary art through inventive 3D printing methods. The 3D printing domain has innumerable possibilities waiting to be tapped. This collaboration will bring together the powerful technology from 3D System and the skilled professionals in the culinary industry. Further, 3D Systems will be offering internship and fellowship opportunities for the CIA students at its 3D printing culinary innovation center, The Sugar Lab, in Los Angeles. Moreover, the two entities will be jointly conducting a range of conferences and seminars for the students and faculty of CIA, utilizing the advanced printing technologies deployed by 3D System at the campuses. CIA is intending to launch a rigorous beta testing program for the ChefJet Pro printer, the novel kitchenready edibility-certified 3D printer. This full color printer can produce customized food products ranging from candies and chocolates to flamboyant cake toppings. Designed using the company s ColorJet Printing technology, the printer comes with user-friendly digital cookbook software for making ornate deserts including candies and sweets with different flavors. CIA is planning to add 3D printing to its curriculum in order to make it easily accessible to its students, alumni as well as other culinary professionals. This initiative will open avenues for a rapid and groundbreaking development of this new technology in the professional culinary industry. Together, the two establishments plan to explore the vast sphere and create opportunities for both education and applications. The printers will be commercially available by the second half of The company will also be conceptualizing a number of events to showcase its offering to the prime members in the hospitality, culinary and related communities. Along with these, the company will also reach out to symposiums and master-classes for further enhancement of 3D printed food items. Once the company s culinary innovation center is operational, confections and other 3D printed food products will be made available online through its Cubify platform. 3D System plans to equip its The Sugar Lab with state-of-the-art culinary printers and novel food ideas. In order to do this, the company will be hosting a number of pastry chefs, mixologists and molecular gastronomists to drive innovation and create unique offerings. 3D Systems Buys Robtec, Boosts Latin American Presence Nov 25, D Systems announced the acquisition of the Latin America-based 3D printing and additive manufacturing company, Robtec, for an undisclosed sum. 3D Systems has acquired 70% of Robtec s shares, while the remaining will be transferred on the fifth year of the acquisition. Equity Research DDD Page 5

6 The deal, a strategic move by 3D Systems, was intended to strengthen its local additive manufacturing service bureau capabilities and also gain a firm foothold in Latin America by creating a key sales and service platform to drive accelerated adoption of the company s entire range of design-to-manufacturing solutions. Apart from proving product synergies, the Robtec acquisition broadens the reach of 3D Systems global Quickparts service offerings, thereby, expanding its reseller channel activities in Brazil, Argentina, Chile, Uruguay and Mexico. Based in Sao Paulo, Brazil, Robtec is the leading additive manufacturing service bureau and also the principal 3D printing and scanning products distributor in the region. Operating for the past two decades, the company has leading industrial companies as its clients. Robtec also enjoys a strong foothold in Latin America with a well-established regional infrastructure. 3D Systems to Acquire Cimatron for $97M Nov 24, D Systems recently reported that it has signed a definitive agreement to acquire one of the leading CAD/CAM software solutions providers, Cimatron Ltd. The news was received warmly by investors as the stock rose nearly 6.7% in yesterday s session. The transaction, valued at about $97 million or $8.97 per Cimatron s share, is likely to be closed by the first quarter of Cimatron specializes in offering comprehensive yet cost-effective solutions for 3D CAD/CAM software products including molds, tools and dies for use in manufacturing sector. The company has two primary product lines, CimatronE and GibbsCAM. CimatronE primarily caters to toolmakers and discrete part manufacturers by providing the required CAD/CAM solutions. GibbsCAM boasts expertise in providing efficient and simple solutions for programming multi-axis CNC machine tools in the CAM industry. 3D Systems expects to generate strong operational and financial synergies from this acquisition, as addition of Cimatron to its product portfolio will significantly enhance its technological development. Cimatron will also augment 3D Systems coverage and marketing capabilities by extending direct and reseller sales. 3D Systems expects this acquisition to be immediately accretive to its cash flow and non-gaap earnings. In the third quarter of 2014, Cimatron reported revenues of $11.2 million and adjusted earnings per share of $0.11. On the other hand, this acquisition will also benefit Cimatron by stepping up its growth level through a stronger presence in the 3D industry. 3D Systems Beats on Q3 Earnings, Revenues Lag Estimates Nov 10, D Systems reported third-quarter 2014 non-gaap earnings of $0.18 a share, which surpassed the Zacks Consensus Estimate of $0.15 by 20%. However, the bottom line declined 37.8% compared with $0.26 earned in the year-ago quarter. On a GAAP basis, earnings came in at $0.03 per share, plummeting 82.4% from $0.17 in the prior-year quarter. 3D Systems business in the quarter was impacted by increasing expenses. Though demand for products remained strong, the company failed to reap the gains fully, owing to certain manufacturing and delivery constraints which weighed down on its earnings. Quarterly Details The company reported quarterly revenues of $166.9 million, reflecting a year-over-year increase of 23%. However, revenues fell short of the Zacks Consensus Estimate of $174 million. Equity Research DDD Page 6

7 The year-over-year upside was driven by an increased demand across all the categories, which translated into organic growth of 12%. However, this increase was partially offset by a delayed availability of the company s latest offerings, coupled with manufacturing constraints faced in the direct metal printer domain. Organic growth was driven by a 57% increase in units sold of the designing and manufacturing printers, organically. Design and manufacturing revenues grew 27% year over year to $155.2 million, while print materials revenues improved 18%. Further, service revenues increased 29%, while healthcare revenues surged a robust 121%. New orders in the quarter totaled $46 million, reflecting a sequential increase of 44%. At the end of the quarter, 3D Systems had a backlog level of $8.3 million. Margins Gross margin remained flattish at 47.8% on a sequential basis. Despite strong margin growth in the company s Materials and Quickparts businesses, margins were adversely impacted by the sluggish revenue growth. The operating margin contracted an astounding 1620 basis points to 4.9% from 21.1% recorded in the prior-year quarter. The huge decline can be due to a significant increase in research and development (R&D) expenditures as well as selling, general and administrative expenses. Cash and Balance Sheet 3D Systems ended the quarter with cash and cash equivalents of $377.3 million compared with $306.3 million as on Dec 31, In the quarter, the company s cash from operating activities came in at $8.6 million. For the nine-month period ended Sep 30, 2014, net cash flow from operating activities inched down to $27.9 million from $28.5 million in the prior-year comparable period. Business Update As evident from its capital-allocation strategies, 3D Systems remains focused on expanding its presence in the high-potential 3D printing market. In the quarter, the company acquired three service bureaus for its Quickparts business, namely, American Precision Prototyping, American Precision Machining and Laser Reproductions. These additions are intended to enhance 3D Systems offerings in aerospace and industrial applications as well as aid its geographical expansion over the U.S. These apart, the company added LayerWise to its direct metal printing division. This acquisition will improve the company s production of medical, dental and aerospace precision metal parts. The company also closed the $120 million acquisition of Simbionix, the Cleveland, OH-based leading 3D surgical simulation and training company. Simbionix complements 3D Systems strength in printing patient-specific instruments and devices, which in turn, will significantly aid the advancement of healthcare industry. Furthermore, the company s training capabilities mark a positive for growth of the combined entity. Moreover, 3D Systems made a number of senior level personnel changes. Also, the company entered into a $150 million five-year credit facility to augment its liquidity and ensure free growth. Outlook The company reiterated its earnings and revenue guidance for fiscal Equity Research DDD Page 7

8 Revenues are expected in the range of $650 $690 million. GAAP earnings per share are estimated in the band of $0.18 $0.28, while non-gaap earnings per share are projected in the range of $0.70 $0.80. VALUATION 3D Systems current trailing 12-month earnings multiple is 53.8x compared with the 29.1x average for the peer group and 18.6x for the S&P 500. Over the last five years, shares of 3D Systems have traded in a range of 16.7x to 283.2x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our target price is $32.00, or 37.6x 2015 EPS, which is well within the historical range. Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low 3D Systems Corporation (DDD) Industry Average S&P Hewlett Packard (HPQ) Apple Inc. (AAPL) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 3D Systems Corporation (DDD) Industry Average S&P Equity Research DDD Page 8

9 Earnings Surprise and Estimate Revision History Equity Research DDD Page 9

10 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DDD. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1143 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DDD Page 10