Alphaform AG: Buyer Beware, 3-D Hype Can Be Dangerous

| About: Alphaform AG (AFRMF)

3D printing stocks have been wildly popular recently. Success stories like 3D Systems (NYSE:DDD), Stratasys (NASDAQ:SSYS), and Voxeljet (NYSE:VJET) have sent investors on a hunt for more undiscovered opportunities. As has happened time and again, finding such gems becomes harder even as more unconventional valuation measures get used in order to justify lofty market capitalizations.

On Monday of this week, the German company Alphaform (AFMRF) was touted by another author as an "exceptional value." As a Germany-based investor who has known the company for years, I strongly disagree.

The Company's Past

Alphaform has been around for almost 20 years, operating as a service provider mainly for the automobile industry, delivering rapid prototyping and rapid tooling parts produced with additive manufacturing technology. One of Alphaform's important suppliers of such technology is a company called EOS, which was founded and is still majority-held by Dr. Hans J. Langer. Incidentally, Langer is also a member of the supervisory board of Alphaform and the largest single shareholder with 18.36% of the shares.

The current CEO Dr. Thomas Vetter came on board in the beginning of 2008 and "diworsified" the business through an acquisition of a company called MediMet in late 2008. That company produced precision-casting parts mainly for the medical market.

Let's look at the numbers that were achieved during the tenure of Vetter so far:

Alphaform long-term Fundamentals; 2013 forecast as extrapolation of Q1-3 2013

in EUR '000 (BV in EUR) 2008 2009 2010 2011 2012 2013f

Sales

21411 19431 20748 26309 27103 26057
Gross Margin 13974 13078 15161 17619 18919 16568
Personnel -7495 -9183 -8903 -10727 -10848 -10569
Depreciation -1831 -2349 -2072 -2240 -1278 -1236
other Costs -5151 -5314 -5504 -5940 -6027 -6049
EBIT -503 -3768 -1318 -1288 766 -1287
Book value per share 3,61 2,89 2,63 2,30 2,40

Source: company reports.

As you can see, the company has been a consistent destroyer of value and has not even achieved meaningful top-line growth.

The Company's Present

As for 2013, the originally forecast numbers are going to be missed big time. The company announced on Feb. 3 that the forecast result of 2013 went from -1.2 MEUR to -2.5 MEUR and that the remaining goodwill of the above-mentioned MediMet acquisition was expected to be impaired, with the final amount yet unknown. They further said:

The reasons for the considerable increasing of the expected loss were, besides repeatedly negative earnings development in the fundamental business area, restructuring expenses and expenses for planning and implementing the required realignment of the Group.

Ten minutes later they released a second announcement (emphasis mine):

Feldkirchen, 03rd February 2014 - The industrial 3D printing service provider Alphaform AG plans an extensive realignment. This is necessary due to the rapid technological development that threatened to overtake the company during the past business year. In the future, the company will focus on the 3D printing main business and on the creation of additional customer benefits. The realignment is accompanied by a restructuring in the organization. It comprises the optimization of the operational processes for recovering the profitability, the expansion of the sales activities to increase revenues, as well as the enhancement of the own engineering competences in order to use the growth chances in 3D printing.

The operational business will focus on a faster order addressing and a better machine utilization with lower unit costs. Sales activity through Key Account Management is further enhanced and additionally sales channels e.g. online shopping and regional sales will be implemented. The first steps were already introduced during the 4th quarter in 2013. In the future, we will offer a more intensive engineering support - principally in 3D print-design - to the increasing number of customers, who are interested in using 3D printing in their production.

Realignment and restructuring became necessary, when it became apparent that Alphaform also forfeited to the earnings in the fourth quarter, although the main business with prototypes and small series recovered to a satisfactory level again. The analysis for this reason was - among others - the reluctance to invest in the past, which led to increasing costs in material and labor force and to a restricted use of the machinery.

According to the further decline in revenues in the fourth quarter of 2013 and the additional costs for the introduction of the realignment, Alphaform concretises its present revenues forecast for the business year 2013 from EUR-1.2 million to now EUR-2.5 million. Additionally, goodwill amortizations at the implants subsidiary MediMet and individual impairment (Einzelwertberichtigungen) are expected, which amount is not yet finally determined. The revenues forecast of approx. EUR26 million is achieved.

Corporate Office extended

In order to push along the realignment, the Executive Board promoted the interim manager Dr. Hanns-Dieter Aberle. Aberle worked in the past eight years as consultant and interim manager for mid-sized enterprises in machine and plant construction, primarily in the areas industrial laser technique and 3D printing, as well as in the segments portfolio management, sales and innovation management.

During the restructuring phase, the finance area is reinforced advisory by an experienced interim manager, Götz Ganghofer. Ganghofer has many years of experience in restructuration and finance management.

A rough estimate of the final result to be expected for 2013 could be:

  • 4.8 MEUR Writedown of MediMet Goodwill
  • 0.5 MEUR Writedown of Receivable ("individual impairment")
  • 2.5 MEUR already announced "normal result"
  • 7.8 MEUR

That would erase most of the remaining equity.

So this "exceptional value" 3D printing stock to me seems much more like a distressed printing service provider that has had bad management, insufficient investments, and is forced by sheer necessity to reinvent itself as a theme stock -- so that maybe they can raise the capital they need to further compete.

The Pitch and the Timeline

This job do they do remarkably well, though:

  • Only two days later, on Feb. 5, Vetter gave a presentation at the company's Investor Day which pictured impressive perspectives of up to 200 million euro in sales potential (page 24) and touted the stock as a comparably low-risk entry into the Additive Manufacturing space (page 38).
  • On Friday the 7th, the Investment Bank Close Brother Seydler AG published a research update (in English) that states:

we got the impression from both that there are 'little' things to handle to put the company back on growth and profitable track.

And it established a target price of EUR 3.30 (= to approximately $4.50) per share.

The same day, trading of Alphaform's shares in the U.S. commenced.

  • On Monday the 10th, only one week after the disastrous announcements, the stock got enormously positive press in the U.S. -- not only the article mentioned above, but also a very positive review from a 3D guru.

And the stock is on fire, rising on volume that is much greater than in Germany.

Conclusion

It is, of course, possible that Alphaform's shares might rise (much) further in price. That is always possible in markets, especially with such glamorous themes as 3D. But up until now the company has performed poorly on many fronts, and even if there is potential, the way to realization will be long and dangerous.

Looking at the eerie timing sequence, my personal advice certainly is "buyer beware." My current valuation for the stock would be below $2.50 per share. If possible, and depending on your risk preferences, I would look for a way to short the stock or buy put options.

Disclosure: I am long AFRMF, DDD, SSYS, VJET. 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: I have kept one remaining AFRMF stock from a previously held position to be able to attend the general assembly if need be. Value is below 6 USD. Economically, I would not consider this as "long," but in order to avoid misunderstandings I wanted to describe the details.