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Arcam AB (OTCPK:AMAVF), a Swedish high-end 3D printer company, released its Q1/2013 results on April 19th with 101% year over year growth in net sales and very interesting views for the rest of the year. Arcam's business is booming and it has great future expectations. Arcam announced about a week ago that it has received a large order and because of that Arcam is quite certain its sales in 2013 will be significantly larger than in 2012. This shows already in Q1 result as increased profitability and amount of system deliveries. It is very likely that Arcam's stock price growth will outpace that of the 3D industry during 2013.

Arcam's First Quarter Results

Here are Arcam's Q1 results from the company website. The press release can be found here in Swedish.

-Net sales increased by 101% to $6.1M ($3.0M)

-Earnings per share amounted to $0.003 (-0.006$)

-Order intake amounted to 6 (2) systems

-4 (2) systems were delivered during the period

-The order book at the end of period was 17 (1) systems

Arcam stated that it had a good start to the year 2013, increased sales and strong order intake. Q1 earnings are charged with non-recurring costs associated with strategic DiSanto Agreement for a total of about $480,000. During Q1 Arcam managed to improve its businesses with several of its strategic customers in aerospace and orthopedic markets. These two industries are Arcam's largest customer segments.

Arcam sees that "a stable order book and an improvement in business creates opportunities for continued strong growth in 2013."

My estimates for the year 2013

In my article a couple of weeks ago, I estimated that Arcam would see rapid growth during 2013 and greatly improve its Q1 result from last year by delivering 6 systems versus 2 systems a year ago. Arcam has now confirmed that it managed to deliver 4 systems and it seems that my estimate was a bit optimistic. However, if circumstances would have been normal, I believe my estimate for delivering 6 systems would have been accurate. Arcam was not able to start full scale production in January due to some challenges that occurred after the capacity increase operation in late 2012.

Nonetheless, Arcam managed to double its order intake significantly compared to last year. My estimate for Q1 system sales was $4M and $0.37 EPS. The result with only 4 delivered systems was roughly $4.3M and $0.13 EPS without non-recurring item to DiSanto Corporation. Here are the numbers for the first quarter of 2013 and my updated estimates for the rest of the year.

2013 Est. (2012)Q4 Est.Q3 Est.Q2 Est.Q1
Order Intake31 (24)14 (12)6 (5)5 (5)6 (2)
Delivered Systems30 (15)10 (8)8 (3)8 (2)4 (2)
Order Book At Period End16 (10)16 (10)12 (6)14 (4)17 (1)
Sales$35.2 ($22.3M)$11.2M ($10M)$9M ($4M)$8.9M ($5.2M)$6.1M ($3M)
Revenue Growth58%12%125%71%101%
EPS$1.50$0.70$0.40$0.40$0.003

As you can see, Arcam is currently piling up its received orders. Arcam has currently 17 orders for its EBM systems. Depending on the details of the delivery agreements, it is plausible that Arcam will have to start delivering these orders in due time. In response to my request for information, Arcam stated that the nominal delivery lead time for the EBM systems is three months but may vary due to a large backlog. Arcam has annual capacity of about 40 systems which would imply that Arcam is able to deliver ~10 systems per quarter at the most. The full capacity utilization rate may be needed if orders will pile up any further or the delivery times for the current orders are during Q2 or Q3.

I have adjusted my estimate for 2013 EPS a bit lower due to the non-recurring costs during Q1. The earnings per share per quarter are quite conservative estimates as during Q1 Arcam reached EPS of $0.13 with only 4 delivered systems and during Q4/2012 Arcam reached EPS of $0.59 with 8 systems. The quarterly results are greatly influenced by the amount of delivered systems and non-recurring costs.

A brief short/mid/long-term analysis

For the short term, Arcam's future is quite bright. Its business is booming and it has only few direct competitors. As Arcam is on its way to make a record year, its stock price could increase from $39 to $75-90 (90%-130%) after the 2013 result about 11 months from now, depending on the P/E. These numbers are calculated with EPS of $1.5 and P/E of 50-60. At the time of writing this, the trailing EPS is $0.60 and P/E is ~64.

During the next 2 to 5 years Arcam's business may finally find a more stable level after delivering 40 to 80 systems annually and possibly having expanded its business to the prosthetics market. In a couple of years, Arcam could see one or several of its competitors become public companies in need of funding and it may need to lower the prices for its printers. As Arcam's business grows and becomes more profitable, it may become a target for a takeover. Possible candidates to acquire Arcam could be 3D Systems (NYSE:DDD) or Stratasys (NASDAQ:SSYS), the largest players in 3D printer market. During the coming years they could be in need of high end printers. In this case merging with other companies could also be a valid option. Arcam's expertise in printing titanium would certainly improve e.g. ExOne's (NASDAQ:XONE) range of high-end printers. The price range for Arcam's stock could be somewhere around $100 to $150 depending on the level of competition and delivered systems.

In the long run, I see only two possible futures for Arcam. The first is that Arcam will reach its limits somewhere high above the current ones and keeps on making money with superior technology but with lots of competition. The second future would be a part of some larger company that has paid a nice acquisition premium in a takeover. Both of these future possibilities are very good reasons to buy Arcam and hold it indefinitely.

A SWOT analysis of Arcam

I presented my previous SWOT analysis of Arcam in my article two weeks ago. I have gathered here some more thoughts and other issues that may affect Arcam's business and stock price.

Strengths

Racer uses titanium in its printers. Titanium is considered as the best possible material for prosthesis as it is biologically neutral and the human body does not reject it. This will open extraordinary possibilities to conquer the prosthetic markets with personalized prosthetic parts.

Due to a novel titanium processing method, many of the airplane parts can now be replaced by titanium parts as the price of titanium is getting cheaper. This may increase demand for Arcam's printers.

Arcam's aftermarket sales are growing strong and will make up roughly 25% of Arcam's revenues during 2013. Constant cash flow is very important due to a low amount of delivered systems annually.

Weaknesses

Arcam stock is traded as pink sheet which may scare away the most conservative investors as the monthly trading amount average is just below 5,000. This may cause some liquidity problems if the stock price starts falling.

Opportunities

Arcam has developed several long-term business relationships with its customers and these may prove to be very profitable in coming years. I see this dependence on few major customers also as a threat, but as the good practice of SWOT analysis prohibits using the same issue in two places, I have left it here.

Threats

Arcam delivers only a few systems annually (15 last year). Any negative issue in manufacturing these systems or an unexpected incident may cause severe damage to the stock price. This would also occur if any of the largest owners would decide to sell their shares. With a limited amount of exchanged shares, the share price would experience a notch.

If one of the larger players would acquire one of Arcam's competitors, it would put huge pressure on the system prices and profit margins.

Conclusion

Arcam is currently heading for a record year in terms of order intake, delivered systems and profitability. Arcam's future outlooks are getting better by the quarter. Arcam has already stated that it can beat its 2012 result with the orders it already has and it has still eight more months to go until the year end. Arcam's stock price will see a definite growth during 2013 as Arcam starts emptying its order book and adding larger numbers to the bottom line.

Source: Arcam AB Announced Record Q1 And 101% YOY Growth