3D Systems Corporation (NYSE:DDD) has been around the market for over a decade and has since then managed to establish itself as one of the largest 3-D printers and related equipment manufacturers in the industry. Benefited through high switching costs amongst customers and high barriers to entry, the company has gained a narrow economic moat, which is bound to persist in the medium-term future, at the very least.
Its vast product portfolio of high-end printers, as well as low-priced offers, the company is set to adapt to shifting consumer preferences, as technological advancements continue. This is especially the case in the rapidly growing prototype product segment, where the firm recently introduced its ProJet 3D and ZPrinter series. In addition to this, the company's acquisition of all consumables necessary for product manufacturing, which attract high gross margin results, helped eliminate third part material sellers, thereby boosting overall results.
So, in the article below, I will analyze 3D Systems Corporation's past profitability, capital, and operating efficiency, in addition to looking at which institutional investors have recently bought the company's stock in the last quarter. Based on this information, we will get an understanding of the company´s revenues, operating metrics and quality of earnings.
Profitability is used to analyze a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section I will study 3D Systems' return on assets, quality of earnings, cash flows and revenue, so as to elucidate if the company is really making money.
In addition, I always compare a company's revenue growth and operating cash flow growth. Over the past three years, the company's operating cash flow has increased by 65%, augmenting from $32 to $53. I advise to look for companies with strong cash generation profiles as these will have less trouble paying off present or future debts.
ROA - Return On Assets = Net Income/Total Assets
ROA is an indicator of how profitable a company is relative to its total assets. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage and in simple terms, tells you what earnings were generated from invested capital (assets).
I do not like the fact that 3D Systems' ROA decreased from 10.89% in 2010 to a current 6.83%. As I am always looking to invest in companies that generate increasing ROAs, this firm's ratio is discouraging, as it is evidence of the company generating less from its assets than it did in 2010.
Quality of Earnings
Quality of earnings is the amount of earnings attributable to higher sales or lower costs, rather than artificial profits created by accounting anomalies. In order to assess 3D Systems' quality of earnings we will compare the level of income with operating cash flows. The company augmented its profits at a rate of 26%, but the growth of cash flows was higher, which is strong evidence of profits being created through a boost in sales or cost reductions.
This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital), while anything over 2 means that the company is not investing excess assets. Following this measurement, most believe that a ratio between 1.2 and 2.0 is sufficient.
3D Systems' current ratio (working capital measurement) increased from 1.74 in 2010 to 3.82 in 2012, meaning that the company has a strong balance sheet and can pay off its obligations.
Gross Margin: Gross Income/Sales
The gross profit margin tells an investor what percentage of revenue/sales is left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors -and overall industry- is more efficient and should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.). This is a quality that tends to attract investors.
Over the past three years, 3D Systems' gross margin has increased from 46.3% in 2010 to 51.2% in 2012, indicating an efficiency boost on behalf of the company.
Asset turnover measures a firm's efficiency in using its assets to generate sales or revenue, in addition to indicating pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.
The fact that the company's revenue growth has outpaced the assets growth (-30% growth) on a percentage basis, indicates that the company is making money on its assets.
I also evaluate recent institutional activity in the stock. In other words, which hedge funds recently bought the stock. In 3D Systems' case, I feel encouraged by the fact that Paul Tudor Jones and Ken Fisher bought the stock in the past months at an average price of $70.76, depositing their vote of confidence in the company's future profitability.
Currently, analysts have a mixed outlook for 3D Systems. While MSN money is predicting that the company's EPS will show stagnant growth rates, remaining at the current EPS of $0.86 for the rest of FY 2014, analysts at Bloomberg are estimating revenue to jump from fiscal 2013's $513.66M to $696.70M for FY 2014.
Despite some risks regarding rapidly changing product cycles and dependency on customer spending, I still feel very bullish about 3D System' long term profitability. This is due mainly to the fact that 3D printers are very hard to replicate, making barriers to entry extremely high.
Furthermore, the individually patented technologies prevent "copycats" from reproducing any product developments until years after it has become outdated. However, I would recommend investors to await a more profitable time to buy this company's shares, as the current value of 112.30x trailing earnings is spiking at an outrageous price premium relative to the industry average of 24.00x.