Stratasys, Inc. (SSYS) has fallen hard since reporting disappointing third quarter results and providing mildly disappointing guidance for 2007. SSYS manufactures rapid prototyping devices that allow designers and engineers to produce prototype parts in their offices in a matter of minutes instead of waiting weeks to have model parts made by hand. The company says 60% of its revenues come from selling the consumables that are used to make the prototype parts.
I have owned the stock for a couple of years and am considering whether to add to my position, sell part of it or write calls against it. With SSYS at $22.24 and the December calls bid at $0.50, writing calls against the stock would yield 2.27% for an uncalled trade and 5.89% if the stock traded over $25 when the call expired and the stock was called. An uncalled buy-write would yield 14.7% annualized and a called trade would yield 137% annualized.
Since my purchase price on the stock is substantilly lower than the current price, the yields would be commensurately higher for me. SSYS sells for 35.8 times earnings, 4.1 times book, 4.2 times sales and 23.5 times cash flow. The five-year expected PEG ratio is a relatively low 1.38, according to Yahoo.com/fiance. In short, the market is fairly optimistic about the company. Stratasys earns a 9.52% return on assets (Trailing 12 months) and 11.42% on equity. The company has no long-term debt. The mean analyst rating is 2 with 1 being a strong buy and 5 being a strong sell. This is ani improvement from a 2.55 a month ago, according to WSJ.com and Reuters Research.
With the stock at $22.24 at Friday's close, Yahoo Finance says SSYS's 12-month target price is $29.17. The point and figure chart on stockcharts.com says the price objective is $10 based on recent action. Investor's Business Daily gives the stock a composite rating of 71 out of a possible 100. SSYS's EPS rating is a healthy 82, it's relative strength has fallen to 81, its industry group relative strength is a B-, its sales + profit margins + ROE [SMR] rating is a B and its accumulation/distribution rating is a weak E. Reuters rates the stock a neutral, S&P and Morningstar don't rate it, Rochdale Research says sell, Sabrient Research says buy and Market Edge second opinion says avoid because of technicals. (See SSYS technicals here.)
Rochdale says sell because it gives the stock a fair value of only $4.50, based on the company's record of earning less than it's cost of capital. Rochdale says SSYS's return on capital is 11.7% vs. its 15% cost of capital. I am holding the stock because SSYS is selling 2,000 units per year, planning to sell 4,000 units per year in the near term and eventually 13,000 units per year. As it puts more units in the field, its consumables business will grow proportionately. Thus the stock is likely to outperform the market for several years.
I may write calls against the stock. With SSYS at $22.24 and the December calls bid at $0.50, writing calls against the stock would yield 2.27% for an uncalled trade and 5.89% if the stock traded over $25 when the call expired and the stock was called. An uncalled buy-write would yield 14.7% annualized and a called trade would yield 137% annualized. Since my purchase price on the stock is substantially lower than the current price, the yields would be commensurately higher for me.
The reports cited above are based on computer generated analysis, and don't reflect the information in SSYS's third-quarter report.
From the press release:
Revenues rose to $26.5 million for the third quarter ended September 30, 2007 over the $25.1 million reported for the same period in 2006. Revenue from proprietary products and services, which excludes all distributed products, increased by 26% in the third quarter over the same period last year. Total system shipments increased 36% to a record 521 units for the third quarter of 2007 compared with 383 units for the same period in 2006. GAAP net income increased 26% to $3.2 million for the third quarter, or $0.15 per share, compared to net income of $2.6 million, or $0.12 per share, for the same period in 2006. Non-GAAP net income increased 24% to $3.4 million for the third quarter, or $0.16 per share, compared to Non-GAAP net income of $2.8 million, or $0.14 per share, for the same period in 2006. Non-GAAP net income excludes the impact of stock-based compensation expense required under Financial Accounting Standard [SFAS] 123R. This expense, net of tax, amounted to approximately $203,000, or $0.01 per share, for the third quarter of fiscal 2007, and $227,000, or $0.01 per share, for the same period in 2006. Revenues rose to $82.0 million for the nine months ended September 30, 2007 over the $74.1 million reported for the same period of the previous year. Revenue from proprietary products and services increased by 27% in the nine- month period over the same period last year. Total system shipments increased 24% to 1,633 units for the nine-month period of 2007 compared with 1,313 units for the same period in 2006. GAAP net income increased 34% to $10.0 million for the nine-month period, or $0.47 per share, compared to net income of $7.5 million, or $0.36 per share, for the same period in 2006. Non-GAAP net income increased 28% to $10.6 million for the nine-month period, or $0.49 per share, compared to Non-GAAP net income of $8.3 million, or $0.40 per share, for the same period in 2006. Non-GAAP net income excludes the impact of stock-based compensation expense required under SFAS 123R. This expense, net of tax, amounted to approximately $546,000, or $0.03 per share, for the nine-month period, and $763,000, or $0.04 per share, for the same period in 2006.
The reconciliation between non-GAAP and GAAP financial measures is provided in a table at the end of this press release.
"Our third quarter results reflect another strong contribution from our Dimension 3D printer business, as total 3D printer units and revenue grew by 44% and 50%, respectively," said Scott Crump, chairman and chief executive officer of Stratasys. "We continued to experience strong demand for our higher-priced 3D printers, but also generated strong growth for our lower-priced BST units into the educational channel.
"Our proprietary high-end system sales grew by 20% over the comparable quarter last year, driven in part by the successful launch earlier this year of the FDM 200mc and FDM 400mc. These two new products represented over 40% of our proprietary high-end systems sales during the quarter. The market's response to the 400mc, launched in August, was particularly favorable. We are pleased with these results, and remain confident that our new product initiatives and renewed focus on proprietary systems will generate positive results as we enter the fourth quarter, a traditionally strong period for high-end system sales.
"Proprietary consumables continued to grow steadily, increasing by 20% during the quarter. Incremental consumable sales from educational customers often lag system sales by several quarters. Given 3D printer sales have been particularly strong this year with educational customers, we believe the coming quarters could see a strengthening in consumable sales.
"We expect to maintain positive momentum in our high-end system business, with another new product introduction planned for later this year. At our global users' conference in September, direct digital manufacturing applications using our proprietary FDM technology were highlighted by several global companies. Our next FDM product should further strengthen our value proposition for these types of applications. "We have shipped more than 2,000 units over the past twelve months, driven by a continuation of strong growth within our 3D printer business. We are planning for 4,000 units per year, with a longer-term vision of 13,000 units per year. We believe that achieving these unit volumes should translate into strong growth for our high-margin consumables.
"We completed our record third quarter with the highest quarter-ending backlog this year. Given that the third quarter is a traditionally weak period, we consider this to be an extraordinary accomplishment. In addition, over half of our backlog is comprised of systems that have been introduced in 2007.
"Given our strong backlog and positive outlook going into the fourth quarter, we remain confident in our financial guidance, and are looking forward to continued success in 2007," Crump concluded.
Stratasys provided the following information regarding its financial guidance for the fiscal year ending Dec. 31, 2007:
- Revenue guidance of $109 million to $112 million, versus previous guidance of $107 to $112 million.
- Non-GAAP earnings guidance of $0.70 to $0.75 per share, which excludes the impact of stock-based compensation required under SFAS 123R.
- GAAP earnings guidance of $0.66 to $0.71 per share.
Disclosure: Author has a long position in SSYS