Are you satisfied with the three digit returns from investing into 3D printing companies? Do you already have a long position in Stratasys (SSYS), 3D Systems (DDD) or one of the others? Would you like to add another long position in some other 3D printer company without investing into a direct competitor of the previously mentioned companies? Well here is a suggestion for you: Arcam AB (OTC:AMAVF).
Arcam AB is a Swedish 3D printer company that manufactures expensive 3D printers which use titanium as their raw material. Arcam's printers are meant for industrial use only and their price tags are around 0.5M-1.1M€. Arcam does not compete directly with the largest players of the field due to major differences in their products. That enables an excellent opportunity to diversify investments in 3D printing industry.
Since the beginning of 2013, Arcam's stock price has already gained 30% in value, but it has potential to easily grow an additional 100% during 2013. Read on to find out why.
A Fundamental Analysis of Arcam
Figure 1 contains the key information from Arcam's website from financial year 2012. Arcam's business is growing at a very nice rate, and it has been profitable for three consecutive years (2010 result was $0.3M). Currently Arcam is doing solid business with great future expectations. It has managed to increase its revenue from both printers and consumables (aftermarket sales), order intake, profit margin and its manufacturing capacity. It has very promising views for the year 2013. Arcam's equity ratio was 60.2 and ROE 20.1.
|Order Intake||24 (12)||12 (4)||5 (3)||5 (2)||2 (3)|
|Delivered Systems||15 (14)||8 (6)||3(2)||2 (4)||2 (2)|
|Order Book At Period End||10 (1)||10 (1)||6 (3)||4 (2)||1 (4)|
|System sales||$15.5M ($11.9M)||$8.1M ($5.4M)||$2M ($1.2M)||$3.8M ($3M)||$1.5M ($1.4M)|
|Aftermarket Sales||$6.8M ($5.3M)||$1.9M ($2M)||$2M ($1.6M)||$1.4M ($1.4M)||$1.5M ($1.3M)|
|2012 System / Aftermarket sales ratio||70/30||81/19||50/50||73/27||50/50|
|Revenue||$22.3M ($17.2M)||$10M ($7.4M)||$4M ($2.8M)||$5.2M ($4.3M)||$3M ($2.7M)|
|EPS||$0.65 ($0.24)||$0.59 ($0.46)||$0.01 (-$0.23)||$0.06 (-$0.01)||-$0.01($-0.01)|
|Profit Margin||10.8% (5.1%)|
Figure 1. Arcam 2012 Numbers.
The first half of the year is usually more quiet than the second half. The first half of 2012 was no different. The annual result was greatly influenced by the first two quarters with only 4 delivered systems. Due to an order book of 10 systems at the beginning of 2013, the first half will be different this year. The latter half of 2013 may show even greater results than 2H/2012 which in turn may put 1H/2013 in shame but at least the start will be great. If Arcam has to empty its order book faster an expected, it could deliver more systems during Q1/2013 than it delivered during Q1-Q3/2012 (7 systems). This would leave Arcam with an order book of 7 systems, and by delivering them, it could almost match 2012 result during the first half of 2013.
However, the aftermarket sales have been growing constantly, and at the end of 2012, the system sales to aftermarket sales ratio was 70/30. Increasing the aftermarket sales is crucial to get more stable cash flow and decrease the cyclical nature of system sales.
Figure 2 describes my projections how Arcam will manage during 2013. The numbers I have chosen are based roughly on numbers from 2012, based on available information for Q1/2013 and what I estimate the growth could be. During 2012, eight out of fifteen orders were delivered during the last quarter. The first three quarters of the year were quite sluggish, as the number of delivered systems were 2, 2 and 3.
The number for order intake and amount of delivered systems are estimates on how fast Arcam can deliver systems with reasonable delivery time. As you can see, I have used quite conservative numbers for the whole year with only minor growth. I think it is better to play it safe and get positively surprised than the other way around. System sales and revenue are also rough estimates based on the last year's numbers. Even with conservative numbers, revenue growth looks great. I have estimated that aftermarket sales will grow conservatively quarter by quarter. EPS is an estimate of how much earnings Arcam could receive from a certain amount of delivered systems. Arcam is expected to improve its profit margin during 2013.
|Order Intake||29 (24)||14 (12)||6 (5)||5 (5)||4 (2)|
|Delivered Systems||30 (15)||10 (8)||7 (3)||7 (2)||6 (2)|
|Order Book At Period End||10 (10)||10 (10)||6 (6)||7 (4)||9 (1)|
|2013 System / Aftermarket sales ratio||74/26||81/19||71/29||72/28||69/31|
|Revenue||$30.7M ($22.3M)||$11.2M ($10M)||$6.9M ($4M)||$6.8M ($5.2M)||$5.8M ($3M)|
Figure 2. 2013 Estimates For Arcam
As a part of a strategic alliance with DiSanto Corporation, Arcam will provide an Arcam Q10 Electronic Beam Melting [EBM] system for DiSanto for free. Due to order backlog, I presume it will occur during the second quarter. Q2 EPS, revenue and system sales have been reduced accordingly.
My estimate of delivered systems during 2013 is 30, 100% more than the amount that was delivered during 2012. I have ended up to this conclusion due to 10 times larger order book (from 1 to 10 systems) at the end of 2012 than what it was in 2011. Also a growth in order intake is expected due to growing customer base and increased manufacturing possibilities of additive manufacturing.
I expect Arcam's profit margin to increase significantly this year due to economies of scope in both printers and aftermarket sales, but also due to considerably cheaper aluminium as raw material.
A SWOT analysis of Arcam
Here are some important issues which may very likely affect the future of Arcam.
Arcam has focused on the higher end of 3D printers and to industrial customers only. Its printers are very expensive compared to the consumer devices of around $500. At its printers' price range, it has only a few competitors (EOS and ExOne (XONE)). Arcam has its most important customers in areas of aerospace and orthopedic industries.
Arcam stated that it doubled its manufacturing capacity during Q4 of 2012. In response to my request for information, Arcam stated that the capacity is now around 40 systems per year. It is clear that the company is investing in its business capabilities as it probably expects some growth during 2013.
Arcam has its roots in Sweden, and thus it may encounter some challenges when it tries to expand to larger markets, such as the U.S. Arcam has already some customers in the U.S., but some of them may prefer a local vendor and turn to Arcam's competitor ExOne. The sales process for Arcam's printers is long. It takes about 6-18 months to complete a deal. Delaying an order or a delivery may have a major impact on the result of an individual quarter.
Arcam does not offer a lower-cost printer in its product range. Arcam's current printers are intended to print very precise titanium parts for aerospace and orthopedic industries, and Arcam's current Q10 and A2 printers are priced 0.5M-0.85M€ depending on configuration and accessories. Arcam is clearly missing a high-output machine that could be sold in greater numbers for cheaper price. Offering a $50-100k printer to industrial customers would be an enormous positive step. It would bring additional steady cash flow from printers, but aftermarket sales would grow significantly. This would require further expansion of manufacturing capabilities and hiring additional salesforce, but in the long run, this would be very profitable.
At the end of February 2013, Arcam announced that it has formed a strategic alliance with DiSanto Corporation, a private player in the field of orthopedic implants. Arcam will arrange financing to support DiSanto's manufacturing capability. As part of the strategic alliance, Arcam has an option to acquire DiSanto in its entirety at any time during the first two years of the alliance. This will enable Arcam to acquire a better foothold in the U.S. orthopedic markets and possibly to move into a new business area with proven success from DiSanto's operations. This would also decrease the cyclical nature of Arcam's business and provide a bit steadier cash flow. Recently, Arcam introduced a new Arcam Q10 3D printer for orthopedic implants.
The Economist reported about a novel method to produce titanium that reduces the price of titanium by roughly 90%. Arcam uses titanium as raw material in its printers. Titanium is being used in orthopedic products as well as in some airplane parts. The problem is that titanium has been significantly more expensive than aluminium and steel. As the fuel prices are going up and the airplanes must be lighter and stronger than before, titanium will probably replace many aluminium and steel parts in the near future. Affordable titanium may prove to be a major business driver for Arcam. The demand for manufactured titanium parts could grow significantly and thus show more demand for the printers and consumables as well.
Arcam has two research projects which concentrate on how to implement faster (EBM) ("FastEBM") technology and higher precision and beam quality ("HiResEBM") to its printers. These research projects are funded by the European Union's Seventh Framework Programme (FP7). Not only can Arcam fund its research with free money, but it can also network with leading research institutions and customers linked to Arcam. This will help Arcam to improve its products even further and create long lasting relationships with its customers. These research projects will be completed in 2013.
The largest threats to Arcam are companies that manufacture printers for the same uses as Arcam does. One of such companies is EOS. EOS is a private German 3D printer company that competes directly with Arcam. Another company is ExOne, which is gaining momentum in selling industrial grade printers in the U.S. Both of these companies have customers in aerospace and orthopedic industries and may affect Arcam's business heavily if one of these companies start gaining market share at a rapid pace.
Arcam's business is highly cyclical due to the price of the printers. A tough economic environment may affect sales considerably. On the other hand, as Arcam's printers are used for implants, prototyping and airplane parts, a bad economy would not be a total disaster for Arcam.
Chinese competition is not a problem yet, but may very well become an issue in the near future. Chinese companies have proven themselves to be excellent in reverse engineering, and I would be surprised if after two years there is not a fast growing Chinese 3D printer company out there. However, due to the nature of 3D printing business, the Chinese competitors may direct their efforts to the consumer printers.
Arcam has its challenges as well as opportunities, but at the moment, its business looks quite good. It has steady cash flow, a large order book and a promising future. With certain improvements to its product range, Arcam could increase its profits and strengthen its position as a higher-end 3D printer manufacturer.
Arcam is an excellent investment choice for those investors who would like to invest more in 3D printing industry, but who also have burdened themselves with too large single positions in for, example, Stratasys or 3D Systems. Arcam is also an excellent choice if you do not have positions in other 3D printing companies at all. As shown in figure 2, even with only a minor growth Arcam can make some serious profit and thus is a strong buy.
With $1.86 EPS and P/E of 40 (currently P/E is about 85) it would suggest a stock price of $74.4. At the time of writing this, Arcam's stock price is $34. This would show a 118% growth. As Arcam is a growth stock, a P/E ratio of 50-60 is not unheard of, resulting in a stock price of $93-$111 (or +173% to +226%). Arcam's stock price is already on its way to the top again and it seems now is time to invest.