First 3D HDTV, Next 3D Printers? The Long Case For 3D Systems

| About: 3D Systems (DDD)

Have you ever wanted to make a model airplane or car but didn't want to have to assemble all the pieces? Have you ever cracked your phone case and wished you could make a quick replacement? Well thanks to 3D Systems (DDD) you can do that from home. It has a line of 3D scanners and 3D printers for home use or commercial production. In its latest annual report it notes possible uses could be in schools, by garage entrepreneurs, or even for automotive parts and prosthetics. In addition to providing the printers the company also provides the printing materials and maintenance service on its proprietary systems.

3D Systems just launched the Cube, its first at home 3D printer. It also maintains a website where people can sell their designs to other people. The person could buy the design and print it right there in their own house. It recently acquired Z Corp for a print engine that is capable of printing in full color. It also recently acquired Vidar which gives it contacts into the healthcare industry. During 2011 it also acquired nearly a dozen other companies the each helped offer strategic growth.

For 2011 nearly 50% of sales were international and no single customer was responsible for more than 10% of revenues. 29% of revenues came from printers and other products, 31% from materials, and the remaining 40% from services. It has a strong balance sheet with $179 million in cash and only $139 million in debt. Total annual profit margin for the year was 47.3%. As is typical with printers, the materials line has the highest margin at 64.8%. Expenses as a percentage of revenue decreased slightly from 2010 by a percent to 32.3% for 2011. Raw materials increased 30% at the end of 2011 versus the same time in 2010. Work in progress increased 211% while finished goods decreased 3%. With its backlog growing, I think 3D Systems is stocking up materials in preparation for even more growth in 2012.

As this is an emerging technology, anyone can invent a similar process and start a company. While 3D holds or has pending nearly 1,000 patents, it could still be overtaken by a better technology. Stratasys (SSYS) is a close competitor and based on its website, it focuses more towards the larger commercial versions of 3D printers. Those products will be more fruitful in terms of more material and more service sales which are the higher margin areas. Both of these companies are close in size and Stratasys has no debt on the books to $35 million in cash. They are currently in a race to be the first accepted company. I think 3D Systems is going well with the at home market, but at $1,299, it is a little pricey to be widely accepted. Right now the main customers are the tech innovators. I think it needs to make sure to keep battling with Stratsys in the commercial market to get its machines into factories and other commercial production centers.

When both companies are so similar how do you choose which to buy? Well, I like 3D because it also offers its 3D scanners. These devices allow for quick and easy replication of items once scanned, instead of having to design them in a CAD program and then printing them. Both are investment possibilities, but I'm going with 3D because I think the price is better and the growth potential is higher. I think once enough people get the printers into their homes, the website with designs for sale will provide an additional source of revenue that Stratasys just doesn't have yet. One thing to watch during the call is that revenues from the printers themselves don't fall too much. I'm expecting a fall of a few percent because with more printers out there more materials and services will be bought and they carry the higher margins. Anything over a few percent means slower printer sales and could be an issue. I think we'll see first quarter revenues near $65 million and profit margins holding steady. I'm hoping to hear 2012 guidance near the $300 million mark. If that happens, we should see shares near $32/share by the end of 2012 with even bigger growth next year as the technology becomes more accepted.

Disclosure: I am long DDD.

Additional disclosure: I may increase my position within the next 72 hours.