Proto Labs: A Phenomenal Growth Story

| About: Proto Labs (PRLB)

Summary

Proto Labs Inc, is a leading manufacturer most investors aren't familiar with.

The company has a spectacular record of growing revenue and earnings and a fair valuation in an expensive market.

The management team has made wise acquisitions while completely avoiding debt.

Business Summary

Proto Labs inc (NYSE: PRLB) is an underfollowed success story and an intriguing manufacturing stock. The company has eight global production facilities that were established between the founding in 1999 and the IPO in 2012. Proto Labs operates through three distinct prototyping and low-volume production options. Namely, the company offers injection molding, cnc-machining, and additive manufacturing (3-D printing) so customers can get high quality parts within a few days. Proto Labs is experiencing rapid growth in revenue, earnings, and operating cash flow. Management expects these trends to continue and valuation is reasonable. For these reasons the enterprising investor should consider proto labs common stock at $77.84/share as of this writing.

Proto Labs has established itself as a major player in a variety of related production businesses. The company has succeeded attacking these competitive markets and can now call itself the world's largest provider of part-making services to product developers. They have earned this distinction by offering a full suite of services from early prototyping, to fit-and-function testing, to short run manufacturing. Proto Labs bases much of their reputation on getting jobs done quickly. Once a customer provides a 3D CAD model and formally engages Proto Labs, the company's protomold service can create products in 1 day to two weeks. This is much faster than the traditional manufacturer's 4 - 12 week timespan. In 2013 Proto Labs took a survey of product developers and determined that the market for their services was approximately seven billion U.S. Dollars. That figure is made up of 2.4B of the 30B CNC-machining market, 3.5B of the 55-60B injection molding market, and 800M of the 2.5B 3-D printing/additive services market. Proto Labs considers itself the leader in these businesses and the total addressable market for their services will continue to rapidly expand as the popularity of 3-D printing explodes.

Excellent Financial Results

In the most recent quarterly conference call management highlighted extremely impressive financial results and forecast continued strength for the foreseeable future. According to John Way, Proto Labs CFO, revenue for Q4 2015 came in at $73.8M, a 31.6% increase over Q4 2014. Due to the diverse sources of growth it seems very likely that the company will continue to experience strong positive sales momentum. Specifically, Proto Labs derived this revenue from 12,414 unique product developers, an increase in customer count of 21% from the same period in the previous year. Within this customer universe Proto Labs saw average spend per developer jump 3%. This suggests that customers who start using Proto Labs unique services are generally very satisfied and tend to expand the relationship. Revenue growth was strong in all three service lines with injection molding growing at 23% yoy to $44M, CNC Machining increasing 19% to $19.6M, and 3-D printing grew 69% to $6.6M stripping out revenue that came from a 2015 acquisition. The business boasts diversification from a geographic standpoint as well. The company reported 35% revenue growth in Europe, Japan grew at 54%, and the U.S. grew at 22%. For full year 2016 the company is forecasting revenue growth between 25% and 30%. Strong revenue growth is the engine that will propel this company's shares higher.

Oftentimes companies that are experience revenue growth above 20% are sacrificing profits to grab market share. These companies are called loss leaders. Not so with Proto Labs. Proto Labs has grown adjusted net income at about 50% cagr from 2009 to 2015. Operating cash flow grew from 48M in 2013 to 58M in 2015. Aggressive revenue growth with simultaneous impressive income growth is rare in the stock market and should be rewarded with a premium valuation. Proto Labs trades at a lofty 43.57 times trailing twelve-month earnings per share. It is important to keep in mind that analysts expect earnings of 2.25/share for the current year, so the stock is trading at 34.22 times forward earnings. This is a very fair valuation for the expected 27% earnings growth and shouldn't discourage investors who are intrigued by Proto Labs' competitive advantage and financial results.

Alphaform Acquisition

In September of 2015 Proto Labs acquired select assets of Alphaform AG related to their additive manufacturing business in Europe. Proto Labs CEO Vick Holt explained the transaction this way, "We are pleased to announce this strategic acquisition which will accelerate the growth of our additive manufacturing services in Europe and complement our current injection molding and CNC machining services…With those three complementary offerings, we're uniquely positioned to help designers and engineers take a product from the initial stages of prototyping through low-volume production." The business results so far seem to support Holt's enthusiasm. According to the Q4 2015 conference call Alphaform contributed $5.1M in revenues already. This translates to negative $0.02/share of earnings contribution. As revenue growth in this segment of the business continues it seems all but certain that the alphaform acquisition will soon be accretive to the bottom line. Furthermore, since Proto Labs ended 2015 with 138M of current assets, 26M in current liabilities and no long-term debt it stands to reason that more accretive acquisitions could be in the company's future.

Conclusion

Proto Labs business is firing on all cylinders. Each geographic area and business segment is seeing revenue skyrocket. The company is achieving this remarkable growth while creating significant and growing profits. The company's management team is optimistic, the balance sheet is pristine, and more acquisitions could be coming soon. Shares of Proto Labs stock are worth careful consideration for investors willing to accept the risks that come with investing in small caps.

Disclosure: the information in this article comes from the most recent conference call transcript and investor presentation.

Disclosure: I am/we are long PRLB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.