Is ExOne A Buy Going Into Earnings?

| About: ExOne (XONE)


Down 50% this year, ExOne looks like an enticing investment considering the expected growth in industrial 3D printing.

Although ExOne's bottom line will be constrained in the short run, the long-term prospects look intact due to its expertise in aerospace applications.

ExOne already has well-known customers such as BMW and Sikorsky, and due to its investments in cutting-edge technologies, it can get better.

Companies in the 3D printing industry are down in the dumps this year. For example, 3D Systems (NYSE:DDD) has lost close to 50% of its market capitalization in 2014, and ExOne (NASDAQ:XONE) is no different. Unlike 3D Systems, ExOne is skewed toward the industrial side of the 3D printing business, providing "machines that enable designers and engineers to design and produce industrial prototypes and production parts," along with "a laser micromachining product for conventional and exotic materials."

Now, this end of the 3D printing market is a big one, as I will discuss below. But before that, with ExOne expected to report second quarter earnings on August 13, let's see what's expected of the company and what its financials might look like.

Impressive growth expected

Analysts expect ExOne to report revenue of $12.11 million, an increase of 31% from the prior-year period. However, its bottom line is expected to take a massive hit. ExOne's loss is expected to go up to $0.14 per share from $0.08 per share in the year-ago quarter. The company had reported a wider than expected loss in the previous quarter as well, as it remained under pressure due to weak equipment sales and higher R&D investments. In addition, its revenue also declined 8%.

In comparison, the expectations for the current quarter look better in terms of revenue. In addition, ExOne also reaffirmed its full-year revenue guidance, calling for growth of 40%-50%.

The opportunity

Now, because the industrial 3D printing market is expected to grow at a fast pace, it is important for ExOne to invest in R&D. As reported by TechCrunch:

"Gartner's forecast shows enterprises continuing to dominate 3D printer purchases over the next few years, with enterprises spending more than $325 million in 2013 vs. $87 million in the consumer segment, and $536 million in 2014 vs. consumer spending of $133 million.

Gartner noted that current enterprise uses of 3D technology focus on "one-off or small-run models for product design and industrial prototyping, jigs and fixtures used in manufacturing processes and mass customisation of finished goods." But as advances in 3D printers, scanners, design tools and materials reduce the cost and complexity of creating 3D printed items, it said applications of 3D printing technology will expand further - drawing in other areas such as "architecture, defense, medical products and jewellery design."

If ExOne achieves its annual revenue target this year, the company's top line will come in between $55 million and $60 million. As such, the company has a pretty big market ahead of it that it can benefit from.

With the 3D printing space getting more competitive, ExOne is looking forward to take advantage of next generation high-volume production machines. The company has made progress in this direction, and is confident that with the binder jetting technology, it will be able to develop such machines in the coming years. ExOne already has clients such as BMW, Bosch Rexroth, and others using its 3D printing machines, and with the growing adoption of the industry, customers such as these should increase.

Aerospace possibilities

Sikorsky, the aircraft manufacturer which is a subsidiary of United Technologies (NYSE:UTX), is looking at ExOne's machines to make finished products for some very complex casting parts. This has burdened ExOne with additional investments, as a result of which its results suffered last quarter. In the words of CEO Kent Rockwell:

"Sikorsky came to us sometime ago and identified that our technology was the only technology that they can see that could get them to where they could get the kind of finished product for some very complex casting parts. And we have worked with them at great length. And its costs a lot of money, it costs us a lot of money in this quarter, which will be described later. But Sikorsky has identified for us, very large sums of revenues that can come from this."

So, management is confident that this is only a short-term pain, because this has given ExOne an opportunity to tap into Sikorsky's other programs and land additional casting orders.

Additionally, bigger players such as Boeing (NYSE:BA) and GE (NYSE:GE) are now looking to use 3D printing. According to ZDNet:

"[M]anufacturers like Boeing and General Electric build their products. The two companies now use 3D printers to make dozens of parts for airplanes and jet engines, for example."

Hence, ExOne's design win at Sikorsky is an endorsement of the company's products and this might allow it to gain traction at bigger players such as Boeing and General Electric in the long run.

Recently, ExOne manufactured a turbine blade to full density using Inconel 625 material, and its customer was pleased with this product. Now, management is looking forward to produce more such products using Inconel. This material is being preferred by a number of customers in various aerospace and energy applications. In addition, the company is also working on titanium and other reactive metals.

Risks and competition

One thing that investors need to watch out while investing in ExOne is its weak margins. ExOne has a negative operating margin of almost 24%, and its profit margin is even worse at 26%. The company also has a high price to sales ratio of 11. So, investing in ExOne won't come cheap.

In addition, investors should also look at the potential competition in the industrial 3D printing space from the likes of Hewlett-Packard (NYSE:HPQ). In May this year, HP announced that it will enter the business 3D printing market. According to a statement from HP CEO Meg Whitman:

"We're focused on business 3D printing, not consumer 3D printing," Whitman told CNBC's Jim Cramer. "We'll announce a 3D printing technology at the end of this year, and we think there's a real opportunity here."

HP is a way bigger company than ExOne with billions in cash that it can use for research and development. So, this is one threat that ExOne needs to watch.


ExOne is a development stage company. It is investing for future growth, which is why its bottom line is not in the best of health. But, in the coming five years, the bottom line is expected to grow at a compound annual rate of almost 25%, and this is quite possible due to the expected growth in industrial 3D printing. So, investors should definitely consider investing in ExOne, and the stock's massive drop this year is an opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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