3D Systems Corp.

NYSE:DDD   3:59:36 PM EDT
+0.36 (+1.64%)
4:00:00 PM EDT: $22.70 +0.01 (+0.02%)
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Why Hope Remains for 3D Systems In Spite of Disastrous Results


##Symbol## DDD

It's been said that 3D printing as a "story" has long been dead. What we're left with is a focus on actual fundamental results company by company. While DDD revenue (TTM) has broken new all-time highs for 25 consecutive quarters and now stands above $650 million, the company's operating margins are falling and net income (TTM) has fallen for five consecutive quarters and now sits in the red (losses). In fact, it's those two metrics in particular that are of greatest concern.

In a sobering note to investors, Oppenheimer wrote "short term strides have been eclipsed by a litany of fresh issues [] its own actions around guidance and its CFO departure are troubling, it is possible that by the time it straightens out its current issues the competitive environment is less favorable, and it is no longer a relative value in the 3D space. We simply see more opportunity elsewhere."

Oppenheimer isnn't the only firm with doubt. In a Bafrron's article, Canaccord Genuity’s Bobby Burleson and Prabh Gowrisankaran said that earnings visibility remains limited in regard to a second half recovery, and as such they are still cautious on companies in the 3D printing space, like DDD, where fundamentals have weakened and misses could be ahead.

DDD stock hit an all-time high of nearly $100 in January of 2014. We'll walk through the bad news, but at the end I'll show you a little piece of good news and why the bearish sentiment has gotten so heavy, that perhaps we are "near" a bottom.

Technicals   |   Support: Stock is Through Support   |   Resistance: 21.66   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

DDD has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-30 $0.04 $178.7 M $177.0 M $160.7 M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 667 559 378

Operating Margin (QTR) 0.902 1.07 1.21 FALLING

Net Income (TTM US$ Millions) -6 43 39

Levered Free Cash Flow (TTM US$ Millions) 52 27 29 RISING

Research and Development (US$ Millions) 22 17 7 RISING

Research and Development Expense/Revenue 0.138 0.117 0.064 RISING

Stock Returns and Chart

DDD is down -28.8% over the last three months and down -40.2% over the last six months. The stock has returned -66% over the last year. It has been an unbridled disaster.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 667559378

Before we get to the "bad," there is some very (very) good. Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (over 20 in this case).Revenue over the trailing twelve months is up 19% and over two-years is up 76%. We do note that the firm has been extremely acquisitive, having acquired well over 50 firms in the last four years, but slice it however you want to, the reveue base is ripping. We do note that organic revenue grow has actually faded to single digits.

What do all these numbers mean?
DDD's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up-trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 0.9021.071.21FALLING

This is perhaps the single most distressing metric surrounding DDD. Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio (obviously) must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter DDD showed a ratio of 0.902. But that's not the end of the bad news.

For the quarter ending Dec. 29, 2012, DDD actually posted an operating margin of 1.29 (the company generated $1.29 per $1 of operating expense). Since that time, this margin has utterly collapsed (as we will see in the chart, below). Worse yet, that's right as the revenue started hitting "big boy" numbers (crossed over $500 million in annual revenue). While revenue has nearly doubled, I don't think anyone gets excited about a business that pays $1 to get $0.90 of revenue, no matter how fast the revenue grows.

What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 1.07. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).

DDD's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) -64339

Given the operating margins we just saw, it's basically a tautology that earnings must be collapsing, and oh my, how they are. Net Income (after tax profit) over the trailing twelve months (TTM) for DDD just hit a net loss of $6 million. Further, net income (TTM) (aka annual earnings) is trending lower meaning that annual earnings have decreased for at least five consecutive quarters. The quarterly number last earnings report fell negative as well, for the first time in over five years. It ain't pretty.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.

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Research and Development (US$ Millions) 22177RISING

One bullish trend for DDD is its continued investment in Research and Development (R&D), which is up 29% year-over-year and 240% over the last two-years. Further, R&D spent per dollar of revenue for the latest quarter is $0.14. Last year this measure was $0.12 and as we look at the final chart, we can se it's rising rather dramatically. At the very least, DDD has not given up on innovation (although some of that cost may be a messy mix of stock based compensation which can get included in R&D).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line.

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So after all of that, how can there possibly be positive news? It's a fair question and I answer it with three quick facts:

1. 50% of DDD stock is owned by institutions.
2. 5% of DDD stock is owned by insiders.
3. 34% of DDD stock is held short (short interest).

So what? Well, that means that 90% of the total float is accounted for. Short sellers don't have a lot further they can go, and while institutions can become crazy large sellers if they need to liquidate, for now, it does feel like all (most) of the bad news is out and the stock has suffered its blow. While it may not be a great investment for upside returns, perhaps (perhaps) the stock has nearly bottomed.