Is a Recovery for 3D Systems Imminent?

When 3D Systems (DDD) was founded in 1986, it was pushing the envelope and offering state-of-the-art services in the 3D printing industry.

Today, as a one-stop solution-provider in additive manufacturing, the company has hit a plateau.

After the stock had triple-digit percentage increases in 2012 and 2013, it fell victim to major corrections in 2014 and 2015. It looked as if it was among a group of former high-flying stocks about to crash to earth.

DDD Chart DDD data by YCharts

But shares of 3D Systems seem to have gotten their mojo back, boasting a 15% jump over the past month.

An invigorated revenue outlook, news of the Alibre acquisition and a smart product launch are pushing the company ahead, even amid what is now a frightening February for many investors.

3D Systems has carved a path strewn with acquisitions, underlining its yearning for aggressive growth. In fact, in 2011 the company closed 16 acquisitions.

More recently, the company has bought firms from China to Israel.

Growth has clearly been a priority, but it has come at a price. Although the company's top line boasts a solid three-year average 41.6% growth, outpacing the industry, profits have slumped at a fast clip, and rapidly declining earnings are a classic sign of a company that could fail.

Meaningful net income (earnings-before-tax margins fell to single digits in 2014 and are in the negative for the trailing 12-month period) has eluded 3D Systems, one reason it fared poorly for the past couple of years, giving it all the earmarks of a toxic stock.

Gradual Recovery

However, the company's preliminary fourth-quarter results, which are scheduled for final release on Feb. 29, have raised hopes. As of now, indications are that fourth-quarter sales sequentially rose by at least 10%, exceeding analyst expectations.

The fact that 3D Systems is exiting the consumer market, discontinuing its $999 Cube 3D printer is a step in the right direction, given that speculative areas in 3D printing have in the past attracted excessive management attention and resources.

The charge related to the shift away from consumer products could be as much as $25 million, reflecting how the company's consumer products acquisitions and strategies haven't really found the kind of success expected. It could also imply a change in the company's hyper-aggressive acquisition approach with the departure of Avi Reichental as chief executive.

The uptick in the company's stock price could also have been driven by tailwinds in the form of 2016 revenue guidance by German 3D printer maker Voxeljet, underlining Wall Street's overdone pessimism about the industry.

It is still too early to call this a major turnaround, but investors are happy that the 3D printing business is inching ahead. Late last month, Jefferies cut its price target on 3D Systems rival Stratasys, and 3D's stock reacted negatively as well, but the decision to step away from consumer products seems to have had a reassuring effect.

Cracking the consumer market is clearly far tougher than what was envisioned, and both 3D Systems and Stratasys have learned that the hard way.

Finally, it all boils down to the business and the shape or form it finally takes. The next two years are crucial for 3D Systems to convince investors that it is committed to driving a complete transformation and achieving profit growth.

With giants such as Hewlett-Packard entering the 3D printer industry, expect more competition and a margin squeeze.

Analysts project a 7.5% annual earnings-per-share growth for the next half decade for 3D Systems, which is 50% slower than the projection for the industry as a whole. Without a doubt, this gap needs to be bridged, which calls for a sustainable re-rating of the company's stock.

At current valuations, 3D Systems looks like it is somewhere in the middle of the pack when considering price-to-earnings ratios and enterprise value/earnings before interest, taxes, depreciation and amortization figures, vis-à-vis peers such as Stratasys, Arcam, ExOne, Materialise and Proto Labs.

The stock looks like it can only go higher from here, making it a solid addition to a portfolio during a time when many overvalued stocks in this volatile market are tanking.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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