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, 3D Angles (35 clicks)
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Summary

  • With giant corporations like Apple and Google eyeing the 3D printing sector, now appears to be a better time than ever to lock up available competitive resources.
  • Having already made 45 acquisitions for a total of $520 million, 3D Systems has ample experience in making strategic acquisitions.
  • Given that the secondary offering is expected to bring the company's net cash above $600 million, investors have another reason to believe that a major acquisition is on the horizon.
  • 3D Systems' recent 11% drop in share price on Wednesday, May 28, was caused by a combination of the secondary offering announcement, negative commentary, and short interest.
  • I believe that the recent drop in price is merely a hiccup and see $50/share as a desirable entry point.

Less than two weeks ago, I wrote about one of the two pure 3D printing stocks with positive EPS. In my article, I explain some of the reasons why I believe Arcam AB (OTCPK:AMAVF) is the best pure 3D printing stock. In this article I will discuss the other pure 3D printing company with positive EPS.

3D Systems Corp. (NYSE:DDD), headquartered in Rock Hill, South Carolina, is the largest pure 3D printing company in the world. The company is a provider of design-to-manufacturing solutions for consumer, commercial, and industrial applications. 3D Systems can print many materials, including metals, plastics, ceramics, and edibles. As of May 29, 3D Systems has a market cap of $5.32 billion and a P/E ratio of 121.

During the past two weeks, the 3D printing industry has been earning the trust of investors again. Some of this is because Google Inc. (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) are rumored to be working on "all in one" 3D printer projects. Some of this is because many shorts had to cover. These two events helped 3D Systems; however, I believe most of their recent run from $48/share to $56.50/share had been a result of a more positive outlook for consumer 3D printing and the recently announced compound annual growth rate (CAGR) of 34.9% for the 3D printing and additive manufacturing industry.

When it Rains, It Pours

It is not very often that investors respond well to dilution. Even though most investors have realized that the additional capital will be used to finance new acquisitions, the news has not been greeted with a standing ovation. In addition to this, Jim Cramer and Barron's decided to pour fuel on the fire immediately after the announcement was made. There was also pressure from the desperate short interest. Finally, JPMorgan and Pacific Crest decided to cut their respective price targets. All things considered, it is a wonder that 3D Systems was able to find such strong support at $50/share.

Now is a Great Time to Make a Game Changing Acquisition

Investors can officially add Wal-Mart Stores Inc. (NYSE:WMT) to the growing list of giant corporations that are interested in benefiting from 3D printing. While tech giants Google and Apple have not revealed whether or not they are scoping out acquisition targets, Wal-Mart makes it clear that acquisition would be their only entry method. In-house 3D printing is no easy task and there are few competitive acquisition targets available.

Who will 3D Systems acquire?

The first company that comes to mind is Arcam AB. The Swedish electron beam melting (EBM) specialist would be an incredible asset for any company; 3D Systems is in a better position to capitalize from this technology than any other company. Because my position in Arcam is larger than my position in 3D Systems, I have very mixed emotions about this potential move. I would imagine that Arcam investors would drive their stock's share price up much higher before allowing an acquisition.

Another possibility is a company located about 500 miles due south of 3D Systems' headquarters in Rock Hill, South Carolina. The company I am referring to is Deland, Florida-based ARC Group Worldwide, Inc. (NASDAQ:ARCW). The thought of this 3D printing service bureau as an acquisition target for 3D Systems had slipped my mind. While doing research on potential acquisition targets, I ran into the latest article on 3D Systems by Gary Anderson and it made perfect sense. ARC Group Worldwide currently uses 3D printing technology and is already the world's largest metal injection molding company.

Although I have not heard about this in formal discussions, 3D printing software and service provider Materialise should also be on the radar. The privately-held Belgian company recently filed for a $125 million IPO. Also, I would not be so quick to rule out Voxeljet AG (NYSE:VJET) or The ExOne Company (NASDAQ:XONE). Despite the recent loss of love for these two high-fliers, proper management may be able to get the best use of their technologies.

There is also a possibility that 3D Systems will look to acquire one or more tech companies that could help with new activities, which include Google's Project Ara. Most investors would be reluctant to endorse another string of small acquisitions, but based on history this is a possibility.

A Look at Major Acquisition Opportunities

CompanyMarket Cap (as of 5-29-2014)
Arcam AB$507 million
ARC Group Worldwide, Inc.$190 million
The ExOne Company$416 million
Materialise$125 million (anticipated)
Voxeljet AG$219 million

*3D Systems should have over $600 million in cash after the secondary offering.

As indicated by the table above, 3D Systems can afford any of these major companies based on market cap. Considering that ARC Group Worldwide is extremely undervalued (forward P/E is around 20), is located within 500 miles of 3D Systems' headquarters, and already uses an acquisition method similar to that of 3D Systems, it may indeed be the best target.

Risks, Questions, and Concerns

  1. 3D Systems has a P/E of 120+. Although it is one of only two pure 3D printing companies with positive EPS, this stock is not cut out for bearish times. The truth is that there is a lot of uncertainty in the near-term future.
  2. Bad Acquisition choices. If 3D Systems was anything like the New York Jets, then I would be worried about them making a bad decision. Personally, I hope they acquire at least one company worth over $100 million. I hope they don't continue to pick up tiny companies, but then again I don't know what's best for them.
  3. Short interest just rose 11%. This can be very dangerous; however, in his recent article Gary Anderson does a great job explaining why short interest can be a contrarian indicator. I also found a good textbook reference that describes situations in which short interest is a contrarian indicator (look closely at the "short squeeze" paragraph).
  4. You can't always get what you want. In many cases, acquisition targets will do everything they can to resist acquisition. This is especially true when a company is growing and already has positive EPS. Companies like Arcam AB and ARC Group Worldwide will likely require a much higher price than their current market caps.
  5. Slippery slope argument. Some investors will be asking "When will it end?" Pacific Crest acknowledges the bearish concern that 3D Systems is primarily growing revenue through acquisitions. The positive side of this is that despite the fact that 3D Systems has made 45 acquisitions over the past 4 years, the company is EPS positive. There are usually much worse "growing pains" associated with mergers and acquisitions.

Conclusion

I believe that the recent dip in share price represents a great buying opportunity for 3D Systems. I actually think the secondary offering is a positive move or at least a "necessary evil". If there has ever been a time to acquire, I believe it is now.

The sharp rise in short interest should not be overlooked; however, it could be a bullish advantage. The shorts already had a bit of a squeeze in the $45-$48 range. Also, the rumors about Google, Apple, and most recently Wal-Mart entering the field of 3D printing are still circulating. A solid acquisition could make 3D Systems an even more desirable target.

Because of how bullish the future looks for 3D Systems, I believe the current P/E of 121 and the 6.6 percent implied dilution are justified. Normally these numbers would be horrifying, but 3D Systems is an exception. It is the largest pure play 3D printing company, one of two 3DPS with positive EPS, and is in an industry with a CAGR of 34.9%.

Source: Long-Term 3D Systems Investors Should Not Be Fazed By Secondary Offering