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Stratasys (NASDAQ:SSYS) is likely to produce solid on target Q4 results. The company is the leading producer of direct digital manufacturing "printers" that take CAD-CAM designs straight from a computer and immediately make the part, without any set-up. The technology enables customers to manufacture low volume products for the same cost as a mass produced item. Stratasys got its start by serving the engineering market. Development teams used the systems to make prototypes directly from computer generated designs, eliminating the need to build models from clay or in the shop. Over the past few years the company has launched larger units aimed at manufacturing customers. Those higher cost systems have begun to catch on and have become Stratasys's primary growth driver. The company also sells consumables (a variety of plastics used as raw material). Demand for those products tends to be greater in manufacturing applications than in engineering. So that segment is accelerating, as well.

The legacy engineering business currently is stalled due to economic factors and a dormant partnership with Hewlett-Packard (NYSE:HPQ). The company originally had high hopes for its H-P relationship (which was aimed at the engineering segment) but the larger company dragged its feet, holding back performance. Last summer Stratasys essentially threw in the towel and reinstituted its own marketing efforts in lieu of H-P. That program is gaining momentum but probably won't make a meaningful contribution until next year. Even so, growth in the manufacturing segment promises to keep overall performance on an upward slope in Q4. Faster gains are possible in 2012 as the engineering unit returns to life.

Direct digital manufacturing has the potential to become a disruptive technology. The industry remains in an early stage of development. But profitability already is well established. And new avenues for growth are opening up. Stratasys has several new products in the pipeline. Enhancements are likely to include larger capacities, faster throughput, lower costs, and a wider range of material inputs. Streamlined user interfaces promise to broaden the market further. A series of inflection points could be reached through the rest of the decade, enabling Stratasys to dislodge entrenched manufacturing techniques in a wide range of applications.

We estimate 2011 income will rise 22% to $1.00 a share. Next year profitability might be impacted by the shift away from H-P to the company's own marketing efforts. Economic factors are likely to weigh on performance, as well. Nonetheless a 15%-20% advance to $1.15-$1.20 a share represents a realistic target. Growth promises to accelerate beyond as the economy recovers and the internal marketing program builds momentum. In 2-3 years earnings could approach $2.00 a share.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.