Is 3D Systems Back on Track?


Way back in February, 3D Systems shareholders were forced to endure one heck of a ride after their stock plunged more than 10% on two separate trading days.

The first time, I chalked it up to wider industry valuation concerns given the absence of any significant negative news. Besides, the stock was trading hands then for nearly 80 times trailing earnings, and some of my Foolish colleagues had been warning such a drop was possible as out-of-control valuations made them wonder whether 3-D printing stocks were a bubble waiting to pop.

However, three days later when the stock plunged again -- this time as much at 15% during intraday trading -- the culprit was 3D Systems' sub-par earnings announcement coupled with light forward revenue guidance.

Despite the drops, however, I insisted nothing had happened to change the incredible long-term potential for the 3-D printing industry, so I pounded the bull's table to say shares of 3D Systems should be bought. Then, just four weeks ago, I was finally able to put my money where my mouth is and purchased my first shares of 3D Systems for my personal portfolio.

The good
Thankfully, Mr. Market made me feel great about that decision Tuesday as investors pushed the stock up nearly 7% following 3D Systems' solid earnings report. Naturally, fellow 3-D printing gurus Stratasys and ExOne were happily guilty by association and once again rode 3D Systems' coattails to close up around 5%.

Of course, that's not to say 3D Systems absolutely demolished expectations like newcomer ExOne managed last quarter. When all was said and done in March, 3D Systems grew first quarter revenue by 31% from the year-ago period to $102.1 million, largely in line with analysts' estimates and helped by impressive 22.1% organic growth. Best of all, 3D Systems increased its printer sales by 81% year over year, and boasted of a 61% overall increase in combined printer and software revenue.

As a result, gross profit rose 38% as gross margin increased 250 basis points to 52.4%. Non-GAAP net income also grew 43% from the year-ago period to $18.9 million, in line with analysts' estimates at $0.21 per share.

The bad?
Still, fellow Fool Alex Planes rightly voiced concern that both 3D Systems' revenue and gross profit was sequentially flat from the fourth quarter, while net income has declined for three consecutive quarters. In addition, despite higher profitability, first-quarter cash flow was also lower than in the fourth quarter 2012.

To be fair, however, this certainly wasn't lost on analysts during yesterday's earnings conference call, and they wasted no time grilling management with questions to see what was up.

Curiously enough, 3D Systems management repeatedly cited timing of printer sales as the main causes of moderation in growth for their health care and services segments, saying they don't expect it to "impede on the growth trajectory" as the year goes on.

When asked about falling year-over-year cash flows, CFO Damon Gregoire once again responded by saying the culprit was a combination of continued higher sales to resellers which built receivables, and the timing of their respective payable accounts.

Additionally, the company expects gross margin to continue its relentless upward climb as the year progresses, especially as they continue integrating the recently acquired Geomagic into their business.

As a result, despite having only accounted for 21% of the low end of their EPS guidance, management is sticking by its previous 2013 estimates of earning between $1.00 and $1.15 per share on revenue of $440 million-$485 million.

Foolish final thoughts
All things considered, while 3D Systems' first quarter wasn't perfect, it went a long way toward restoring investors' confidence that the company can deliver on its promises. I'll be hanging tight to my own shares, but with the stock once again trading for more than 80 times trailing earnings, the importance of that confidence can't be understated.

3D Systems is at the leading edge of a disruptive technological revolution, with the broadest portfolio of 3-D printers in the industry. However, despite years of earnings growth, 3D Systems' share price has risen even faster, and today the company sports a dizzying valuation. To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on the company's shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In our report, we take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell the stock today. To start reading, simply click here now for instant access.

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Motley Fool contributor Steve Symington owns shares of 3D Systems. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 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.

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