Why A Beaten Down ExOne Looks Like A Good Long-Term Opportunity

| About: ExOne (XONE)


ExOne's recent results were bad as the company's gross margin dropped drastically and its losses widened year over year.

Investors, however, should consider capitalizing on ExOne's weakness as it is adopting smart strategies to profit from industrial 3D printing growth by investing in new materials technology.

ExOne also faces some risks, such as potential competition from Hewlett-Packard and weak profit margins,. but it is slated to improve in the future.

The industrial 3D printing market is expected to grow at a good pace in the future, opening up opportunities for companies like ExOne (NASDAQ:XONE). However, ExOne's performance has been quite bad this year, with the stock losing more than 50% of its value. In addition, ExOne disappointed the Street with its weak second-quarter numbers that failed to meet expectations.

Although its revenue increased year over year, so did its losses. In addition, its margin also declined on account of costs related to product development, along with the under absorption of costs related to its expanded production service center network. Hence, even though ExOne reported a 21% rise in its revenue to $11.2 million, its net loss widened to $0.32 per share from $0.08 per share during the same period last year. This was way behind analysts' expectations of $0.14 per share. Its gross margin also declined to 22.3% from 45% a year earlier.

Working on a turnaround

Clearly, this was a pretty bad performance from ExOne, and it is not surprising that the stock is trading close to its 52-week lows after taking a solid beating this year. But, management is taking various initiatives to bring the company back on track. ExOne is working with various materials such as metals, carbon, and graphite, among others, that would create new avenues for the company in 3D printing technology.

ExOne operates on a global platform, with two-thirds of its business coming from the global market, while one-third comes from the U.S. market. Moreover, with growth in the industrial sector, 3D printing is gaining traction. For instance, according to 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."

As a result, ExOne needs to invest aggressively in product development to tap the industrial 3D printing market, as technological innovation plays a key role in this industry. Hence, to strengthen its R&D, ExOne is raising its capital investment. The company has applied for a new set of patents, which, according to management, are very strong with regard to new material applications. As already mentioned, it is trying to incorporate new materials in 3D printing, and these patents are believed to help it achieve its goal.

Investments for the future

The company has already made investments for the development of nickel-based alloy 625, which will be mainly used in the aerospace industry. Now, the aerospace industry is expected to be a key consumer of the 3D printing industry, as 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."

In addition, ExOne has also introduced a new S-Max version, which will allow the usage of both phenolics and inorganic binders more effectively. The company is also designing a new lab platform that will be implemented later this year.

ExOne's ExCast initiative is also progressing well. This is a multi-step production process that combines optimized product design with 3D printing, and merges them into metal casting. With this initiative, the company can now deliver castings that are made of advanced materials and in complex shapes that previously were difficult to make.

ExOne is also working to improve its efficiency. The company is building its new headquarters in Europe that would integrate its five European locations into a single unit. In addition, it is expanding its facility in other locations as well, such as Japan and Italy among others.

ExOne has also racked up a robust order book, with more than twenty machines on order for the third quarter, and more than thirty machines for the fourth quarter. Thus, on the sales side, the second half of the year seems to be a strong one for ExOne.

Risks to consider

Investors, however, should not ignore the risks that ExOne is facing. First, PC giant Hewlett-Packard (NYSE:HPQ) is making moves in industrial 3D printing. Earlier this year, HP sounded out its intention of tapping the business 3D printing market. As per 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."

In addition, ExOne is far from being profitable. The company has a profit margin of a negative 33%, while the operating margin is also a negative 32%. At the same time, the stock is quite expensive, considering that it trades at a price to sales ratio almost 10.


As such, ExOne's fundamentals look weak. However, the company is expected to deliver improvements going forward. This is seen by an expected bottom line improvement of almost 99% next year. The long-term projections also seem strong, as ExOne's bottom line is expected to grow at the rate of almost 25% for the next five years.

Moreover, given the company's strengthening order book, innovation moves, and the expected growth in the industrial 3D printing industry, ExOne can get better in the long run, making it a good investment in the drop.

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.