3D Systems Corp (DDD) is a company that pioneers 3D printing. In its simplest description, it is the process of taking a digital photo and using its data to create a physical object through a 3D printing process. It is a radical technology that has the power to be a game changer in a new industrial revolution. It can eliminate waste in the manufacturing process, as excess material can be stored in the printer in a way similar to ink in a conventional printer. Eliminating machinery and human labor in traditional assembly can attract the manufacturing process back to the developed world.
The company has had a solid track record. Last quarter, its revenue came in at $78 million, beating analysts and up from $48 million the previous year. Even better, earnings came in at $0.23, a blistering $0.10 higher than estimates. It is a growth investor's dream when we see a forward PE multiple of 27x, which is more than double (12x) the industry average. Earning estimates for the rest of the year and 2013 have been raised. And most analysts have it as a strong buy as the potential for 3D printing continue to expand.
Surplus no longer needed?
With lower costs and risks, manufacturing could be redefined with 3D printing technology. In the past, a plant would have to manufacturing thousands of products just to cover its fixed costs. But 3D printing could put an end to that as mass-manufacturing would no longer be needed and individual orders could be custom made as mass production. With less energy, less material, and less labor power, manufacturing could enter into a new, productive era. This is the potential of what 3D printing can do and why the field is wide open for the company.
But there have been signs of a slowdown in the long bullish movement of the stock recently - one we could take advantage of since we are at the forefront of the possible change in direction. There are a couple things I see.
Secondary Offering Contributes to Short Term Price Weakness
3D Systems announced a public offering of shares recently - an additional underwritten public offering of 3,700,000 shares. The price will be $27.00 per share. After deducting the underwriting discount and estimated offering expenses payable by the company, the company expects to receive net proceeds of approximately $95.2 million. Often, when a secondary offering like this is announced, the value of the stock decreases. Why is this? One way of measuring the strength of a company is by the EPS. Well, when a secondary offering like this is made, it dilutes the value of the stock and thus the earnings per share. If a company had 1000 shares of a stock and offered another 100 in the secondary offering, the EPS would be worth half of what it was, diluting the values of the shares.
Negative Divergences Abound
While the stock continues to rise on a bullish "peak and valley' pattern, bouncing off the 50 day MA, the RSI and MACD indicators are projecting warnings that the upward trend may be coming to an end. In the RSI we can identify a negative divergence that always signals weakness in the upward trend. It started in May but we can make a case if we go all the way back to February and watch the strength of the move slow down. The MACD moving averages are signaling the same thing, and the MACD histogram to a lesser extent. What does this mean for the investor? It means that we should watch for the stock either reached its high soon, or that it already has reached it. It could signal the beginning of a reversal.
The Options Trade
Between the secondary offering and the weakness we are getting from the indicators, we are going to take advantage of the possible turnaround that is coming with a Bear Put Spread.
- Buy the August 2012 put with a strike of '30' (priced at $2.20)
- Sell the August 2012 put with a strike of '25' (priced at $0.50)
- Net Debit to Start: $1.70
- Maximum Profit: $3.30
- Maximum Risk: net debit
- Maximum Length of Play: 2 months