I don’t think so!
3D Systems (NYSE: DDD) sells printers that are used to print anything from dinosaurs to dental crowns. But can the company print money for you? On Thursday July 26, DDD reported 2Q earnings. Let’s dig in to find out.

On the surface, DDD’s results weren’t all that impressive. Revenue came in at $83.6 million (just missing the average estimate of $84.1 million) while non-GAAP eps simply met the average estimate of $0.27. Not great, right? But that’s not the whole story. A closer look shows a much better story:
•Growth is fantastic. Here are some quick numbers. Printer units were up 112%, not including the May introduction of the highly anticipated Cube printer. Printer revenue grew 61%, materials grew 60% and services grew 39%. Their relatively small healthcare business grew 87%. Professional and Production printer sales increased 138%. To add an exclamation point to those results, the company exited the quarter with a backlog of $12.3 million distributed across all of their revenue categories (a 28% sequential increase from 1Q12).
•The razor blade model is working. DDD bears may cry foul because I haven’t pointed out that production printer sales dipped 12%. But the company has been driving toward lower cost printers so this should come as no surprise. What matters is how much material these printers consume which, DDD says, is at least equal to the more expensive printers. Want proof? Recurring revenue amounted to 69% of total revenue for the quarter. Clearly, the model is working.
•Gross margins are expanding. With the improvements in the overall business, gross margins now stand at 51.4%, up from 45.7% in 2Q11. But don’t cue Kool and the Gang quite yet. Operating margins actually decreased by 240 basis points from the first quarter (but only 80 basis points comparing 1H12 to 1H11). Part of the problem is their acquisition strategy. After all, they’ve added 10 businesses in the past year and four in the second quarter alone (Bespoke, FreshFiber, Paramount, and My Robot Nation). That translates into a bunch of duplicate expenses not contributing revenue. The fact that operating margins didn’t go down further is evidence that management is serious about taking cost down relatively quickly. Operating margins will be something to watch going forward, but I can live with their current results for now.
•Guidance is better than you think. DDD maintained their wide guidance range, which may have caused the market to flinch, at least initially. Their 2012 revenue guidance is $330 million – $360 million, while they are projecting non-GAAP eps anywhere from $1.00 to $1.25. Again, not great, right? Wrong. DDD maintained their previous guidance, even though they will have added 4.1 million shares, or almost 8% of their first quarter diluted share count, from their recent secondary offering. This increase in shares, effective for about six months of 2012, essentially means that DDD has guided earnings about 4% higher.
•Acquisitions are adding value. I’m always nervous when a company decides to go on an extended spending spree. But it’s hard to argue with the company’s decisions thus far. The Vidar and ZCorp acquisitions plugged holes in DDD’s product offerings and doubled their sales channel. They have expanded into the fast-growing medical device field with Bespoke Innovations and solidified their rapid manufacturing business with Paramount Industries. Their recent acquisitions in the low end space combined with the introduction of their Cube printer, has DDD’s Cubify.com website looking like THE place to go for consumers interested in 3D printing. When (not if) the consumer segment takes off, DDD is positioned to be a major player.

So what is one to make of a report like that? Clearly, the market didn’t know. The day after earnings were released, the stock was down 11% before making it all up by the close. The following day, the market pushed the shares up to a new 52-week high. The market is conflicted. Should you be?

The business is executing well. The 3D printer business looks solid – just take a look at the quarterly results from Stratasys (NASDAQ: SSYS), DDD’s largest competitor. The future indeed looks bright, but there’s just one problem: shares are crazy expensive. As of this writing, the share price is around $39, meaning that DDD is trading at a P/E of over 66. In the last few days, it’s been as high as 68. That’s waaaay up at the top of its historical range.

But if DDD meets analysts’ expectations for 2012, the P/E would be 34.7 by the end of the year. And if they hit the 2013 average estimate, then the forward 2013 P/E would be a much more reasonable 27.7. That sounds downright cheap for this kind of growth.

My net? Few investments offer the kind of immediate growth and long-term potential of DDD. You’ll pay a price for that kind of quality growth today, but it sure looks to me like it’s worth it.

The Fly says:

September 21, 2012 at 1:29 am

That’s a blog

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JTU says:

September 21, 2012 at 7:31 am

I tried posting a link but it would not take so I had to cut and paste, sorry.

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