Back in April in my article titled, "3-D Printing Could Lead To A U.S. Manufacturing Resurgence," I went over the investment potential in the 3-D sector, focusing on Xerox (XRX) and discussing the potential in the other 3-D stocks, Stratasys Ltd. (SSYS), 3D Systems Corporation (DDD) and The ExOne Company, (XONE). I also discussed iRobot (IRBT) as a new entrant into the market. Since the writing of the article those stocks have gained the following:
- XRX $8.29 to a high of $10.55 for a 27% gain
- SSYS $69.60 to a high of $113.46 for a 63% gain
- XONE $32 to a high of $71.90 for a 125% gain
- IRBT $24.38 to a high of $41.12 for a 72% gain
As you can see above the sector has been on a large move over the last four months. We have also seen a consolidation wave begin with SSYS buying out peer Makerbot for $403m. In this article I am going to cover what I believe is the cheapest 3-D printing stock there is and make the case for investors to consider a long term investment in it. The stock we are going to look at is Cimatron Ltd. (CIMT). The company designs, develops, manufactures, markets, and supports computer-aided design/computer aided manufacturing (CAD/CAM) software products. The company offers CimatronE, a CAD/CAM solution, which provides tools, applications, and process-automation solutions for the tooling and manufacturing industries. In layman's terms CIMT builds the software that drives the design and manufacturing of 3-D products. The prime target users for CIMT's new products are mold makers using 3D-printed conformal cooling systems, a very big potential market that is growing leaps and bounds right now.
First off let us look at the most recent earnings report for CIMT, a rather impressive one at that. Highlights of Cimatron's results for the second quarter of 2013 include the following:
- Record second quarter revenues of $11.0M
- 89% gross margin and 14% operating margin on a non-GAAP basis
- $0.13 non-GAAP EPS
- $3.4M increase in net cash, to $7.1M
For the first six months of 2013, revenues were $21.2 million giving us an annual revenue run rate of $42.4. Cimatron recorded an operating profit of $2.2 million for the first six months giving us an annual profit run rate of $4.4m. This gives CIMT a forward PE of 12.58. You can see from the chart below some key financial metrics for CIMT. In the following section I will go over the same valuations of the 3-D peers to show investors just how undervalued I believe CIMT is.
XONE has a market cap of $950m as of today with $38m in revenue. The company is not profitable. It is trading at a price to sales multiple of 25. Next up we have SSYS, the clear leader in the sector and the other profitable 3-D stock. SSYS trades at a market cap of $4.33 billion with $324m in annual sales. This gives us a price to sales multiple of 13. DDD is not profitable as of the last earnings report. It has a market cap of $5.33 billion on annual sales of $415m. This gives us a price to sales multiple of 13 just like SSYS. Organovo Holdings, Inc. (ONVO), a recent up-listing to the NYSE, has $1m in revenue and a market cap of $450m for a price to sales multiple of 450! This stock is a perfect example of the mania sweeping the 3-D sector right now.
Now we are going to look at CIMT. The company has a $44m annual revenue run rate as we discussed above and trades with a $60m market cap. This gives us a price to sales multiple of ONE. I have bolded and capitalized one to have it sink in just how cheap the stock is compared to its peers.
If I ignore the speculative fluff we see in shares of ONVO and just focus on XONE we can see the glaring disparity in market valuation. CIMT has more sales, is profitable but shares of XONE are trading at 15 times the valuation of CIMT. If we are to assume a conservative price to sales multiple of 5 times for CIMT it would give us a market cap of approximately $300m or a share price of $30. If we assign the sector price to sales multiple of 10+ then we arrive at a market cap of $600m or a $60 per share stock price. Even using the most conservative prices to sales multiple of 2 times we would still see a stock price of $12 per share, a 100% gain. From every metric I look at CIMT is massively undervalued when compared to its sector peers. This large disparity made me dig into the earnings trend in CIMT as there is a possibility the reason for the large divergence with its sector could be growth. As you can see from the chart below CIMT is growing revenues annually by 5% but it is growing profits at a larger 20% rate. Expenses have been flat as revenues have grown and this has resulted in a drop to the bottom line. This is a very good sign for investors. CIMT is also investing heavily in the 3-D sector now as mentioned by the CEO in the most recent earnings report.
Earlier this month CIMT and Moldex3D together announced an agreement to deliver an integrated cooling simulation tool within CimatronE to address the growing design needs for more efficient cooling systems in the plastics industry. Per the conference call the company expects this to drive revenues.
The stock market can be inefficient. Sometimes stocks such as CIMT fall under the radar of investors, especially in sectors where a handful of stocks grab all the attention. However, for investors that find these undervalued stocks in a hot sector before the crowds do, the gains can be very large. CIMT, based on the valuations in its sector and the price to sales multiples the 3-D stocks enjoy, should be trading at $30 minimum. That is a six-fold increase in price. When XONE did its IPO earlier this year it was called overvalued at $20 and today it is $71. CIMT has larger sales, larger profit and a market cap that should play catch-up in the coming months. For investors looking to get into the hottest sector out there right now, 3-D manufacturing, at a price that is screaming value play, then CIMT is a stock that should merit a VERY STRONG look. It is profitable, cash flow positive and trading at a multiple a fraction of its peers. In my next 3-D sector update article I will look and see if we gained similar returns as those given from the April article.