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Investing in 3-D printing takes patience

Tuesday, August 4th, 2015

I couldn't help but notice that once again the company 3D Systems Corp. (NYSE: DDD) has fallen to a new 52-week low. Last week it hit a low of $13.54 per share, a level not seen since the year 2010.

If you're not familiar with this company, it makes 3-D printers and it became very hot in 2012 as the stock rose from about $30 a share to more than $90 per share in late 2013.

There was much hype over all these companies that were making 3-D printers, and how they were going to be the wave of the future, and how you needed to buy these companies immediately at any price.

Fast forward to today, and we see the stock has fallen nearly 90 percent. I became curious that maybe now is the time to get into a 3-D printing company, which I do believe we’ll be seeing more of in the future.

I discovered there was no price-to-earnings ratio because in the recent quarter, the company lost $13.18 per share -- thanks mostly to a large increase in selling general and administrative (SG&A) expenses -- and this wiped out $7.03 of earnings from the previous three quarters.

I can't explain why, but over the last two years, the SG&A expenses have climbed from $29.45 million for the March 2013 fourth quarter to $74.3 million for the March 2015 fourth quarter -- a huge increase.

If you own this company, or are looking at buying it, you should invest a lot of time understanding why the SG&A expenses are increasing so much. Price-to-sales is 2.6, also higher than the industry at 2.0. Price-to-tangible-book-value does look good for the company at 4.6 compared with a higher industry average at 6.6.

However, price-to-cash-flow does not look good for the company at 31 over the last 12 months -- almost four times the industry average of 8.5.

Year-over-year sales did increase by 19.2 percent versus the industry average of 12.2. But as I pointed out earlier, earnings-per-share year over year for the last 12 months fell by 113 percent, mostly because of the SG&A expenses.

The company appears to have staying power with a strong balance sheet and a good amount of liquidity. The company has a current ratio of 3.2, which is well above the industry average of 1.3. Total debt to equity is 0.7 compared with an industry average at 38.4.

This tells me the company has no current fear of going bankrupt and should be around for at least a few more years in hopes of generating some good yearly profits. One thing that will have to change for the company to see profits is a positive net profit margin compared with the current negative profit margin of 0.9 percent.

The company competes in the industry of computer peripherals so it may not be the fairest comparison, but with that said, the efficiency of the company doesn't look that good. The receivable turnover is only 4.5 over the last 12 months compared with the industry average of 7.9.

Inventory turnover is very concerning at 3.5 far below the industry average of 15.3.

Looking at the generally accepted accounting principles (GAAP) earnings estimates going forward to December 2016, I see a mean estimate of 38 cents per share based on 10 analysts. The range of those estimates is rather large, with the high estimate coming in at 69 cents and low estimate at only 18 cents per share.

Using a multiple of 16.5 would yield a target sell price of only $6.27, which is well below the current price of about $13 or $14 per share.

I thought I would look out until December 2017 with the estimate jumping to 74 cents, but don't waste your time computing a target sell price because that is only based on the estimate of one analyst. I like to see at least four or five analysts to get a good mean estimate.

So I do believe that this company will survive and, perhaps by 2018 or 2019, it might be making some good earnings. The question is: Do you want to have dead money in your portfolio for maybe a year or two?

Maybe we can revisit this company in the summer of 2016 to see if things look any better, or perhaps the stock will be cut in half again, making it a better value buy.

I hope you're not one of the investors who bought this company in 2012 and beyond in hopes that you would have a quick winner. I'm writing about this company to help investors understand to be careful about what you pay for the earnings of a company, because sooner or later, the stock will trade on the earnings and you could be left with a big loser for years to come.

Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!


Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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