The New Stratasys Earnings Preview

| About: Stratasys, Inc. (SSYS)

Stratasys, Ltd. (NASDAQ:SSYS) plans to report the first earnings on March 3rd since the completion of the Objet merger last December. The market will want to see the guidance provided for the combined company after nearly a year since the original announcement of the merger. The huge gain since the accretive deal became a reality will place a great importance on the reality of the accretion level.

The company manufactures 3D printers and materials for prototyping and production. It offers a range of 3D printers and 120 3D printing materials.

With the huge sector selloff since mid-January, the market has become increasingly concerned about the stock. Negative analysis continues to surface regarding competitor 3D Systems (NYSE:DDD) providing Stratasys with the opportunity to become the recognized leader in the sector. In addition, the recent IPO of ExOne (NASDAQ:XONE) provides more competition for 3D industrial sales and investor cash.

Objet Merger

The Objet merger was finalized on December 3rd when the stock was languishing in the upper $60s. The merger immediately makes the company a leader in 3D printing and direct digital manufacturing. A major concern has surfaced on whether the merger has remained very accretive considering the delay and limited updates.

The stock now trades at a lower level than at the point of the merger finalization providing a much better entry point for investors.

Earnings Forecast

A major benefit of the Objet merger was the ability of Stratasys to acquire the private company on the apparent cheap. The deal will be immediately accretive and potentially significantly so considering the ability for synergistic revenue gains.

Nearly 90 days after the merger, analysts have increased the earnings estimates for 2013 from $1.71 to $1.86. Though with the recently lowered estimates, analysts on average expect earnings to be $0.07 lower than the original updates following the deal finalization. Earnings are now expected to grow roughly 35% in 2013. See table below:

* Data provided by Yahoo! Finance.

The original pro-forma Q1 numbers had the earnings increasing from $0.28 to $0.32. This nearly 15% increase in earnings if applied to the original 2013 estimates would probably lift expectations to $2. Conversely investors can add 15% to the $1.40 the company guided to for the final 2012 earnings. Assuming the same accretive percentage as Q1 for the full year, on a pro-forma basis the company would earn around $1.61 for 2012. Investors can model the earnings potential for 2013 based on the appropriate growth rate. 30% earnings growth similar to that of 3D Systems would yield an amount of $2.09. On the flip side, the current analyst target of only $1.86 suggests just 16% earnings growth over the pro-forma numbers.

3D Systems Induced Sell-off

A major reason for the pounding the stock has taken lately was the disappointment over the 3D Systems earnings. A big part in the earnings report was a general confusion over the estimates after the 3-for-2 stock split completed in February. Ironically the company beat Q4 estimates and guided towards 2013 earnings of $1.075 that beat analyst estimates.

The company reporting Q4 and 2012 numbers prior to the split and the guidance based on the split exacerbated the confusion. As an example, the company reported earning $1.25 in 2012 and guided towards $1.075 in 2013. Naturally uninformed investors misinterpreted that as the company guiding down for this year. In reality, the company earned around $0.83 in 2012 based on the stock split and guided towards 29% earnings growth.

While the negative reports continue to mount on the real organic growth of the company, the real telling part continues to be that the diluted earnings per share soared in 2012 by over 54%. That is exactly what investors want, but it obviously does question the ability of the company to continue growing via accretive acquisitions especially as the company gets larger. 3D Systems only reported 18.8% organic growth in Q4 questioning the overall growth ability of the 3D printing market and the valuation of that stock.

Stock Valuation

When the Objet deal was announced on April 16th, the stock traded around $35 and quickly soared to over $40 that first day. Investors were wise to jump on board then as the stock continued to nearly double by the time the merger was completed. It eventually reached over $90 in January.

Now with the stock down around $64 is it a bargain? Well that entirely depends on the combined guidance. If the company guides towards the $1.86 number of analysts, investors will likely sell the stock in droves. If the original pro-forma numbers flow through to the 2013 numbers, the company will earn more than $2 this year. Based on those higher numbers, the stock currently trades at a more reasonable 25x 2014 expectations. It all depends on the Objet numbers on March 3rd.

As the below chart highlights, the 1-year returns in the sector remain high even after the large sell-off.

^SPXTR Chart

^SPXTR data by YCharts


As mentioned in the previous articles on Stratasys, the huge potential is only equaled by the huge valuation. The Objet numbers and integration will be key to whether the stock is viewed as cheap or expensive. Most investors don't question the growth potential of the sector as rapid prototyping and on-demand parts can disrupt and replace existing manufacturing processes.

The analyst estimates have declined over the last couple of weeks for a reason. It is possible that the company has leaked that 2013 estimates are too high or maybe analysts are not correctly doing the math. Maybe analysts were duped by the 3D Systems confusion. Either way, the sub $3B valuation for Stratasys will one day be considered awfully cheap though the question remains whether that is on March 3rd of this year or 2015.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SSYS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.