William Blair Cuts 3D Systems (DDD) to Underperform; Too Much Hype, Future is Cloudy

May 16, 2013 6:38 AM EDT Send to a Friend
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Price: $36.67 -15.47%

Rating Summary:
    10 Buy, 11 Hold, 2 Sell

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    Up: 29 | Down: 28 | New: 24
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(Updated - May 16, 2013 12:14 PM EDT)

3D Systems (NYSE: DDD) is lower on the session amid a downgrade at William Blair earlier. The firm took its rating from Market Perform to Underperform, with no set price target.

Analyst Brian Drab gave three key points for the call today:

1. The Staples (Nasdaq: SPLS) opportunity might be overblown. He noted that 3D Systems is up over 21 percent since the announcement on May 3rd. Sales through Staples will add only a few cents to EPS, at best, even if it sold 10,0000 systems a year. He alludes to a similar announcement between Stratasys (Nasdaq: SSYS) and Hewlett-Packard (NYSE: HPQ) in 2010, which was unsuccessful and dissolved in 2012.

2. Lots of purchases. Drab noted that 3D Systems has acquired 32 companies since August 2009, or one every 42 days. That consumes a lot of management's time and poses potential integration risk. It's also a challenge to identify the company's organic growth, which management has been selective about issuing.

3. Sustaining 20 percent-plus organic revenue growth will be challenging. Drab comments, "Assuming revenue growth of about 25% in the materials segment and about 15% revenue growth in the services segment in 2013 (excluding RPDG contribution), the company would need to report an average of about $50 million in printer/product revenue in each of the remaining quarters in 2013 to achieve the midpoint of management’s guidance. With a full quarter’s contribution from Geomagic, the current quarterly run-rate is about $43 million."

4. A significant increase in accounts receivable has cut free cash flow by 40 percent. Shares currently trade for about 64 times Drab's NTM free cash flow estimate.

5. Management has also been selling stock. Tech chief and founder Charles Hull sold 500,000 shares in March 2013, now holding about 0.5 percent of the company. Chairman Walter Loewenbaum and CEO Avi Reichental also sold shares recently, in the range of 21 percent to 24 percent of their holdings.

Other risks for the 3-D printing segment include: increased competition, too much media hype, and optimistic management.

Shares of 3D Systems are down about 1.1 percent Thursday afternoon.
For an analyst ratings summary and ratings history on 3D Systems click here. For more ratings news on 3D Systems click here.

Shares of 3D Systems closed at $47.67 yesterday.


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