Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
- Two direct competitors to Cimatron Ltd. (CIMT) have had buyout offers in the past 45 days. With CIMT having a lower market cap and cheaper valuation than either Delcam Plc (OTC:DLCAF) or Realtime Technology AG (R1T.DE), the thought of an acquisition of CIMT by a larger software company may not be farfetched.
- As announced in the latest Q3 conference call, CIMT is working to develop products and solutions for the software side of 3D printing. CIMT also established a 3D-printing advisory board, of which legendary expert Terry Wohlers was named the first member.
- CIMT's revenues and net income have consistently grown for the past five years. In November, CIMT announced record Q3 earnings, and Q4 earnings are expected to set a record as well.
- In comparison to DLCAF and R1T.DE, CIMT has similar growth and profitability but is severely undervalued. We believe CIMT should immediately be valued at $14.75 per share, which is up more than 100% from current levels.
- CIMT has paid dividends since 2011, and the past two dividends were followed by rises in share price of 51% and 19%, respectively.
CIMT develops and distributes CAD/CAM software for the manufacturing industry. CAD/CAM software is essential for the designing and manufacturing of 3D parts. CIMT is ranked among the top six CAD/CAM suppliers in every global region, according to its company profile. With more than 30 years of experience and more than 40,000 installations worldwide, Cimatron is a leading provider of integrated, CAD/CAM software solutions for mold, tool, and die makers as well as for manufacturers of discrete parts.
With the stock trading at levels cheaper than those of its peers, we feel the company could be the next takeover candidate as two of its peers had buyout offers in the past 45 days. CIMT's revenues and net income have consistently grown for the past five years, and the company has a strong cash position with barely any debt. Additionally, CIMT is poised to benefit on the software side of 3D-printing manufacturers such as 3D Systems Corp. (DDD) and Stratasys Ltd. (SSYS). 3D Analytics has completed a thorough review of CIMT and determined the stock is grossly undervalued and should be immediately valued more than 100% above current levels. Consequently, we assign a buy rating on the stock with a $14.75 price target.
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Autodesk to Acquire Delcam
On Nov. 7, 2013, Autodesk (ADSK) announced its intention to acquire Delcam "for £20.75 per share, or approximately £172.5 million in a transaction that will be structured as a cash offer for all the outstanding shares of Delcam." At the current exchange rate (1 British pound sterling = 1.63 U.S. dollar), this would value DLCAF at $33.82 per share or approximately $281 million.
On Dec. 5, 2013, Dassault Systèmes said it "intends to launch in the coming days a tender offer in order to purchase up to 100% of RTT's share capital for a price per share of EUR 40." At the current exchange rate (1 euro = 1.37 U.S. dollar), this would value R1T.DE at around $242 million. R1T.DE is currently trading around EUR 41.50 above the tender offer, as investors are betting that the tender offer will be raised in the future.
Danny Haran Comments on Consolidation in the Industry
In the Q3 conference call, Danny Haran, Cimatron's president and CEO, said "Well, in general, we believe consolidation should happen, is happening and will continue to happen in this market. … The recent acquisition of Delcam was definitely news this week, but is not the first acquisition of this year [and] definitely not the last couple of years."
Terry Wohlers, Member of CIMT Printing Advisory Board
On March 6, 2013, CIMT established a 3D-printing advisory board, of which expert Terry Wohlers was named the first member. Wohlers has been the leading authority on 3D-printing technology for more than two decades. He said:
Cimatron has long been a strong player in the CAD/CAM software market, and it is only natural for the company to leverage its knowledge of manufacturing-software solutions by exploring opportunities in 3D printing.
By 2015, we believe the 3D printing industry will be worth $3.7 billion, and a successful deployment by Cimatron in this market will provide it strong potential for growth.
CIMT Product Launch in Mid-2014 for 3D Printing
CIMT is talking to customers and creating solutions for the software side of 3D printing. On Aug. 7, 2013, Cimatron and CoreTech System Co., Ltd. (Moldex3D) jointly announced an agreement to deliver an integrated cooling-simulation tool within CimatronE. This tool will address the growing design need for more efficient conformal cooling systems to create higher-quality molds and shorter cycle times using advanced 3D-printing (additive manufacturing) technologies. As stated in the Q3 conference call, the new product is expected to launch in mid-2014.
In our view, CIMT's planned foray in the 3D Printing business could well turn out to be a game-changer for the company (if well executed), driving massive TAM expansion. Acceleration in demand for 3D Printing is expected to be driven by lower cost of 3D Printers, refinement in technology for its use in custom manufacturing and its increasing adoption by individuals. CIMT, by leveraging its deep expertise and experience in the CAD/CAM software, is well positioned to tap growth opportunities in the burgeoning 3D Printing market, in our view.
Record Q3 Earnings
On Nov. 12, 2013, CIMT announced earnings for the third quarter. As highlighted in the press release, the company had its "best ever third quarter with record Q3 revenues, operating profit and net profit." Compared to the previous year's Q3, revenue increased by 9% and net income rocketed up by 83%.
Q4 Expected to Be Another Record Quarter
On the recent Q3 conference call, Haran was asked to comment on the coming quarter. He responded, "Generally, and this has been true almost every year, Q4 is the strongest quarter of every year." The analyst estimates for Q4 call for revenues of $12.6 million and an EPS of $0.19, which would make for a record quarter.
Consistently Growing Revenues and Net Income the Past Five Years
Using those analyst estimates for Q4, we can conclude that for fiscal year 2013, the company would have revenues of $44.1 million and an EPS of $0.49. As shown in the table below, CIMT has a strong track record over the past five years of consistently increasing revenues and net income.
A Peer Group Comparison Shows CIMT Is Significantly Undervalued
When comparing CIMT to its peers, we find CIMT to be severely undervalued and a superior unrecognized value at current levels. CIMT is cheap in all valuation measures and is comparable in growth and other measures to R1T.DE and DLCAF.
Here is a table to compare CIMT's growth to that of R1T.DE and DLCAF over a three-year period (2010-12).
By taking the ratios below and averaging them, we conclude CIMT should be valued at $14.75 per share, which is up more than 100% from current levels.
CIMT has paid dividends since 2011. The past two dividend amounts were larger than prior dividends and were followed by a rise in its stock price. Those two dividends were declared on Feb. 5, 2013, and Dec. 27, 2012, in the amounts of $0.42 and $0.43, respectively. If an investor would have purchased shares at the open on the dates the dividends were declared and sold at the close on the ex-dividend dates, the gains in value would have been 51% and 19%, respectively, for the investor. Almost a year has passed since the most recent dividend announcement, so another dividend might be announced soon.
We believe CIMT is undiscovered, which creates a huge opportunity for investors to profit. CIMT should be an attractive acquisition target, as the company is cheap compared to DLCAF and R1T.DE, with strong financials and growth. CIMT has a positive outlook, especially given the expected growth of the 3D printing industry, from which the company is poised to benefit. Consequently, we assign a buy rating on the stock with a $14.75 price target.