- Recent optimistic statements of the CEO sound very exciting.
- The strategic acquisition of Advanced Powders & Coatings is expected to have a significant positive effect on Arcam's earnings in 2014.
- Arcam is a potential acquisition target.
- Arcam has three buy ratings and an average analyst price target of $46.
- The recent pullback gives investors a great opportunity to take a position in this highly promising Swedish 3D printing company.
I started aggressively buying Arcam AB (OTCPK:OTCPK:AMAVF) at $8,5 post split last year and plan to hold this company for at least another year or two. The recent dip has been a wonderful opportunity for me to buy more shares. I know some of the institutional investors that are holding Arcam AB and be assured; they only buy if the future for Arcam looks bright. In this Seeking Alpha article, I want to give an update on a number of very positive recent developments and explain why I am personally so confident in the future of this Swedish company. I am long shares of Arcam AB.
I would honestly recommend reading One Up On Wall Street by famous Wall Street Guru Peter Lynch. To be a successful investor, you have to develop emotional discipline. Do your own due diligence and trust in your own investment thesis. Trying to time markets is a fool's game.
1. Significant increase in production speed expected
During the recent annual general meeting on March 27, 2014, a question was raised how much the production speed can be increased in the future. Magnus René, the president and CEO, answered: "I believe that 10 times faster is within fairly easy reach, but I also think that up to 100 times faster might be possible." It was indicated that the current Q20 machine produces around 30% faster than earlier machine types.
If Arcam AB is able to increase the production speed by a factor of 10 and is able to patent this new technology, shareholders can be more than confident that this small Swedish company will be an absolute winner in metal 3D printing. I believe that this is an increase that could drive production of high-grade metal parts used in aerospace and medical applications closer to rapid manufacturing from rapid prototyping and small-lot production.
2. Recent optimistic statements of the CEO Magnus René
On March 7, 2014, Swedish news agency Direkt wrote that around a dozen companies are about to order equipment for 3D printing in 2014 and that Swedish Arcam AB is in an excellent position in these negotiations. The agency Direkt is referring to is US investment bank Jefferies and its latest research paper. Arcam's president & CEO Magnus René is quoted saying that "that's what we are trying to achieve. It is absolutely possible that we will receive a volume order already this year, but it is nothing I can promise." Asked about the current production capacity, Mr. Rene says: "We have the capacity to manufacture 40-50 machines today. We are in close discussions with our customers and well prepared for whatever can happen."
At the annual general meeting on March 27, 2014, Magnus René also mentioned that the aerospace industry will soon ramp up production with 3D -- he actually claimed that he might sit in an aircraft containing components produced in an Arcam machine already before the end of this year! Magnus now has taken the words "volume order" in his mouth publicly. He is usually rather cautious in his statements so I more or less expect Arcam to exceed these expectations. If we would see two to three volume orders the market will probably become euphoric and drive the share price to new heights, given the right market environment.
The 2013 Annual Report is now available in English, which is worth downloading from the website. In the report, Arcam management reiterated that 2014 revenue will be greater than 2013 and that the company is poised for great things in 2015 and 2016.
In addition to selling systems, the company is experiencing robust growth rate in metal powder, contract manufacturing, and services and support. Primarily, the growth has been in the aerospace sector, which is still in the early development stage of adding 3D printing to their supply chain. Of a total of 27 orders in 2013, 16 came from the aerospace industry.
3. Strategic Advanced Powders & Coatings acquisition
Arcam recently acquired AP&C (Advanced Powders and Coatings) located in Boisbriand, Quebec, Canada, which is a producer of the most spherical and purest metal powders produced by plasma atomization and the world's best titanium powder producer. The powders are used primarily for medical, aeronautical and commercial applications. AP&C quality powders are sold in more than 30 countries on three continents.
With this acquisition, Arcam has secured access to high quality titanium powder for its customers' quickly growing business. In addition, AP&C has now recently developed a powder of higher quality -- with particles that are considerably "rounder" than before. AP&C is a very, may be the most, important supplier for the whole metal 3D metal production market/industry that is set to grow massively (see reason number 10 of this article). It was communicated at the annual general meeting (linked above) on March 27, 2014, that Arcam has no ambition at all to put restrictions on other 3D metal production technologies, suppliers or customers. On the contrary, Arcam's opinion is that they will support the entire segment to grow in the future. Obviously, Arcam does not mind to be in strategic control of the powder provisioning for this industry. One synergy effect was explained in detail: Arcam machines do not require the highest granularity of powder… their powder particles should be around 50 micron, while the finer powder is excellent for Laser based printers requiring higher granularity.
The total purchase price amounts to CAD 35 million where a cash payment amounting to CAD 20 million has been paid on closing and the remaining part as two installments to be made in 2015 and 2016 subject to certain targets being met. The AP&C division is expected to have generated CAD 6.5 M of revenue during 2013 with an EBITDA result of about CAD 1.5 M. The acquisition is expected to have a significant positive effect on Arcam's earnings per share in 2014.
4. Impressive institutional ownership; Oppenheimer increasing its share of Arcam
According to MSN Money (April 10, 2014), institutional ownership of Arcam is 27.46 % and mutual fund ownership is 26.95%, making an impressive number of 54.41% owned together. Arcam already has considerable institutional ownership, including famous names like Oppenheimer, Thornburg, TIAA-CREF, Nuveen, BlackRock, iShares and Fidelity. In this context, Oppenheimer Global Opportunities Fund recently increased its share of Arcam by 19% to 5.6 percent. The fund recently took advantage of the dip induced by the negative Barron's article to increase its share of Arcam from 4.7 to 5.6 percent of capital stock.
5. Arcam AB certainly is a potential acquisition target
Last year, there had been speculation for some time that 3D Systems (NYSE:DDD) was looking to acquire metal 3D printing technology to complement its existing and extensive 3D printing portfolio. Metal capabilities were clearly the glaring gap in the company's offering.
On June 12, 2013, 3D Systems announced that it had signed agreements to acquire the French Direct Metal 3D printer Phenix Systems. Phenix Systems designs, manufactures and sells proprietary Direct Metal 3D Printers that can print chemically pure fully dense metal and ceramic parts from very fine powders. The company uses the technology of Metal Laser Sintering. Listed on the French stock market, this small company often flied below the 3D printing radar.
Now in April 2014, 3D Systems is enjoying a huge demand for its metal printing machines. The company has a long backlog order of its Phenix PX Direct Metal printers. 3D Systems' decision to buy France-based Phenix Systems last July 2013 is now proving to be a fantastic deal for the company. The maximum price payable by 3D Systems was EUR 13 per share. The price per share on the day before the acquisition was 5.79 euro. That is an impressive premium of 125%. While I do not expect that such a high premium will be paid for Arcam, I think the premium that will be offered will be certainly substantial and well over 50%. I personally think it would be wise to buy Arcam before it has grown into a multibillion-dollar company. I am sure Arcam AB is not interested in being acquired but it seems there is a lot of interest from various players including very big names in the industry.
In a recent Reuters article on Arcam, published January 23, 2014, the takeover possibility of Arcam AB is further discussed, also mentioning 3D printing expert Terry Wohlers. "Is Arcam an acquisition target? Of course. Are many of the laser-based companies targets? They are as well" said Wohlers. "Arcam would be a good fit everywhere and I can very well understand if sector companies are tempted" said Thomas Carlstrom, investment manager at Swedish state foundation Industrifonden and Arcam's largest owner.
6. Canaccord Genuity raised its price target for Arcam to $50, while Jefferies keeps its $46 price target
On Jan. 31, 2014, Canaccord Genuity raised its price target for Arcam to 325 Swedish kronor ($50) from the previous 275 ($42) Swedish kronor. The analyst recommendation is buy. Canaccord Genuity Group, Inc. is a well-respected Canadian banking and financial services company that specializes in wealth management and brokerage in capital markets. In their analysis, Canaccord Genuity writes: "We believe Arcam's revenue growth will be well above that of the 3D printing industry, driven by penetration of tier-one orthopaedic implant customers and a ramp to volume production by aerospace customers."
Interesting to see the comments of Canaccord Genuity on the car maker market: car makers have been using additive manufacturing for prototyping for many years. Canaccord Genuity believes automotive in time will become an important market for Arcam. However, with high production volumes and cheaper materials in the car industry, this is obviously not likely to be around the corner.
On March 6, 2014, U.S. investment bank Jefferies said that Arcam's differentiated (EBM) technology is well suited for mass production of highly complex metal parts. They believe that large orders are likely to occur during 2014. Jefferies maintains its estimates and Swedish kronor 300 ($46) in price target but upgrades to "buy." "Our checks indicate that 6-12 large industrial groups are in deep discussion with metal 3D printing companies on larger orders that will be integrated into existing production lines. We believe that GE, Stryker, JNJ, EADS, Airbus, BMW, Medtronic and others are likely to place large orders in 2014" wrote Jefferies.
GE, the largest potential buyer of metal and 3D printers, today has orders for (LEAP) engines for a value of 68 billion dollars and will spend $3.5 billion in carbon and 3D printing equipment over the next five years. Jefferies believes that GE will take the supplier's decision in 2014 with initial production in 2015 and an increase in production at the end of 2015/2016. In addition to fuel and injection nozzles, Jefferies believes that there are many other parts of the (LEAP) engines that will probably be 3D printed -- potentially by Arcam machines. "We believe that Arcam's (EBM) technology can create products with titanium that surpasses any other process" wrote Jefferies.
7. Sweden's biggest bank, SEB, now follows and recommends Arcam
Arcam has received a "buy" recommendation with a target price of 273 Swedish kronor ($42) by SEB on March 19, 2014, according to an analysis entitled "Rise Of The Machines." Skandinaviska Enskilda Banken AB (SEB) is a Swedish financial group for corporate customers, institutions and private individuals with headquarters in Stockholm, Sweden. In their recommendation, they describe that the market for additive manufacturing is on the verge of a rapid increase in volume and Arcam AB is well positioned to capitalize on the trend. "Arcam is engaged in the high-end metal segment (10 percent of the industry) and in end product manufacture -- here we expect an annual average annual growth of 30 percent, well above the industry as a whole."
The Bank assesses that Arcam's revenues will grow by an average 45 percent per year during the period 2014-16. The operating margin is anticipated to rise from under 10 percent today to 16 percent in 2016. Earnings per share in the same year are expected to be 5,59 Swedish kronor ($0.856), and the April 14, 2014, stock price of Swedish kronor 175 ($26,60) gives a P/E ratio of just over 31. SEB further highlights the exceptional strength of the Arcam Electron Beam Technology (EBM) -- "a world-class technology" -- which, thanks to its speed and accuracy is particularly suited to customers in the aerospace and orthopedic implants markets.
8. New very well-connected chairman of the board: Göran Malm
Göran Malm (born 1947), with a Master's degree in business administration and economics, has previously had top management positions within SKF, General Electric and Dell -- i.e., as President General Electric Asia-Pacific and President Dell Computer Corporation Asia-Pacific. Other former Board of Director assignments include Samsung Electronics, Envac and Micronic Laser Systems. At present Göran Malm has Board positions at Dornier MedTech GmbH (DE) and UFI srl (IT).
Göran Malm was also a member of Samsung's Principal Board for nine years, most of this time as the only non-Korean member. There are very few Swedes with similar experience of international transactions, and that have a network that can match that created by Göran Malm. Göran Malm has also held a guest professorship at the Gothenburg School of Economics and Business Administration, where he is still a frequent guest lecturer. For the medical business, Malm also gives Arcam exposure to Dornier MedTech GmbH.
9. 3D Systems acquired Medical Modeling on April 2, 2014
Medical Modeling, Inc. is a leading provider of personalized surgical treatments and patient specific medical devices, including virtual surgical planning and clinical transfer tools, using 3D modeling and printing that is rapidly changing how reconstructive surgery is done today. The company was acquired by 3D Systems on April 2, 2014. If you check their homepage, the first thing you see is a nice picture of an Arcam machine they are using for titanium implants. So, this deal should help Arcam's coffers, assuming 3D Systems continues using the EBM systems, and the use of these systems increases.
10. Dramatic growth expected in Arcam's market
The independent research company Canalys predicts that the 3D printing global market will reach $16.2 BIL by 2018. That would mean over 500% growth led by automotive, medical and aerospace applications. Arcam is very strong in two out of three of these sectors. Companies specializing in 3D printing may have been branded the "most hideous" stocks recently, but the sector will continue to produce stellar growth over the coming years, according to latest research by Canalys. Its estimates show the sector stood at $2.5 billion globally in 2013 and will rise to $3.8 billion in 2014. And in five years, the company believes the market will grow by over 500 percent with a year-over-year growth rate of 45.7 percent.
Canaccord Genuity confirms future dramatic growth of metal printing: in a brand-new research report released Wednesday, April 2, 2014, on the industry overall, Canaccord Genuity analyst Bobby Burleson said additive manufacturing "will be increasingly driven by a shift to serial production parts rather than a near exclusive focus on prototypes, models, and secondary manufacturing (jigs, fixtures, etc.). Central to this shift is the rise of metal 3D printing. ...Metal printing is on the cusp of dramatic growth..." Printing Metal in 3D using powders have been getting more and more attention recently, especially in commercial aviation, which has recently begun exploring how to use metal 3D printing as a way to manufacture parts that significantly reduce weight loads and improve fuel efficiency. General Electric lately reduced the weight of a 100-pound jet engine bracket that mounts the engine to the wing by nearly 84% -- all while maintaining its structural integrity (linked above). To me, this is truly an amazing development.
What Could Go Wrong?
Of course, Arcam business activity is associated with a lot of potential risks. The market is characterized by very long order processes and timing of customer orders may affect the company's earnings in the future. Arcam operates in a market that can be characterized by long sales processes which results in a large forecast uncertainty. Arcam is dependent on the relationship with its major customers. Loss of one or more of Arcam's largest customers would have a negative impact on Arcam's business, financial condition and results.
Arcam is facing competition from various players like every company does. To mention in this context are German companies (EOS), Concept Laser and SLM Solutions. Realizer and Renishaw are further examples of providers of similar laser technology but of somewhat less importance with respect to competition. SLM Solutions GmbH, a German maker of 3D printing machines, is preparing an initial public offering that may value the company at about $700 million, according to people with knowledge of the matter. SLM's printers fashion components from aluminum, stainless steel and titanium, using lasers to melt and fuse powdered metal. SLM stands for selective laser melting. I personally do not think that Arcam's business will come under pressure from its competitors but will watch the mentioned companies closely. Another challenge could be to build up and manage a growing organization which will be critical in the future. I am convinced that Arcam already has proven to be able to do so.
After all, a change in the economy in general and the outlook for the airline industry or implant industry in particular may affect the company's financial position and earnings significantly.
Swedish 3D printing company Arcam AB has shown to produce truly ground breaking products. In my opinion, it is only a matter of time before they manage to present an EBM machine that could rapidly become the method of choice for producing aerospace components given its speed and far superior quality in comparison to conventional methods. This development is backed given the recent very positive comments at the annual general shareholder meeting. I believe that the current clear positive trend in Arcam AB will continue in 2014 based on many of the drivers discussed in articles linked here. For me, investing in Arcam AB is the best choice to invest from all 3D printing companies.
My personal price target for Arcam AB for 2014 is $75+/share, based on fundamentals driven by an increasing number of orders, several high volume orders and a growing investor awareness of the company in the market. My expectation holds as long as there are no major market setbacks.
However, Arcam AB is definitely not a recommended investment for the impatient or the risk averse. This is not a recommendation to buy the stock. Please consult an investment professional and do your own due diligence prior to making any investment, including in Arcam AB.