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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
  • A Simple Valuation Model Of DDD Using Revenue As The Independent Variable. 0 comments
    Apr 29, 2013 12:38 AM | about stocks: DDD, SSYS

    A Simple Valuation Model of DDD using revenue as the independent Variable.

    - 3D Systems Corp. -

    1. Modeling Cost of Revenue as a function of Revenue (Yearly Data 2008-2012)

    Independent Variable (x) = Revenue

    Dependent Variable (y) = Cost of Revenue

    The OLS regression exhibits the following Coefficients: y = 0.4541x + 13.445

    Chart1: Cost of Revenue as a function of Revenue

    2. Modeling Selling and Administrative Expenses as a function of Revenue (Yearly Data 2008-2012)

    Independent Variable (x) = Revenue

    Dependent Variable (y) = Selling and Administrative Expenses

    The OLS regression exhibits the following Coefficients: y = 0.2628x + 2.4756

    Chart2: Selling and Administrative Expenses as a function of Revenue

    3. Modeling R&D as a function of Revenue (Yearly Data 2008-2012)

    Independent Variable (x) = Revenue

    Dependent Variable (y) = R&D

    The OLS regression exhibits the following Coefficients: y = 0.0534x + 3.4157

    Chart3: R&D Expenses as a function of Revenue

    1. Deriving OPERATING INCOME from Revenue

    OPERATING INCOME = REVENUE - COST OF REVENUE - SELLING & ADMINISTRITIVE EXPENSES - R&D

    OPERATING INCOME = x - (0.4541x + 13.445) - (0.2628x + 2.4756) - (0.0534x + 3.4157)

    • where x = Revenue

    OPERATING INCOME = 0.2297x - 19.3363

    Chart4: Forecasted Operating Income vs. Actual Operated Income

    The Company Revenue Mix has been pretty constant over time:

    Printers & Other Product: 27.05%

    Print Materials: 27.239%

    Services: 33.92%

    Healthcare: 11.79%

    We can therefore express the Future Total Revenue as a function of the Printers & Others Revenue:

    Total Revenue = Printers & Others Revenue / 0.2705

    If we assume that:

    1. Long term debt and therefore the resulting Interest expenses (optimistic assumption) remain constant (i.e. they are not a function of revenue)

    &

    2. A tax rate of 25%

    This is the resulting Net Profit as a function of Generated Revenue in the Printers and Others Segment: (click to enlarge)

    To value DDD investors need to:

    1. Forecast the Revenue generated 5-6 years from now
    2. Decide how much is worth today the future resulting Net Profit.

    Wohlers Associates Report On Additive Manufacturing and 3D Printing states that the compound annual growth rate (OTCPK:CAGR) of additive manufacturing was 29.4% in 2011, according to the new report. The CAGR for the industry's 24-year history is 26.4%. The AM industry is expected to continue strong double-digit growth over the next several years. By 2015, Wohlers Associates believes that the sale of AM products and services will reach $3.7 billion worldwide, and by 2019, surpass the $6.5 billion mark.

    The Current Cost for Capital/Equity for DDD estimated by mean of the CAPM. The Market is implying/Demanding a 13.84% yearly Return on DDD. Equity Risk Premium for S&P is currently estimated at 5.78%. On a 6 year Horizon, this translates into a discount factor of 2.1765.

    To value the Company an assumption about the Terminal PE-Ratio (2019) is needed. The following table represents the deviation from the implied Fair Value (in terms of Market Cap / not considering possible dilution). A $6.5 billion total Market for the year 2019 is assumed.

    Everything comes down to expectations about the PE multiple at which DDD will be trading at in 2019, as well as to the market shares the company will have. This model does not take into account the likely pressure on prices that new competitors entering the space will cause.

    Wohlers Associates Report On Additive Manufacturing and 3D Printing (see Company Presentation page 5: link) The market for 3D printers was about $1.9 billion in 2012. The Revenue DDD generated in the Printers & Others product during the FY2012 was $84.9 million, corresponding to a 4.44% Market share.

    If we assume that DDD will be able to double its market shares in the coming 5 years and a Terminal PE of 20, the Fair Market Capitalization lies about 10% below the current Market Cap Value. If we assume that the Market Share will remain unchanged, then DDD is overvalued by almost 100%. The lower the chosen Terminal PE is, the higher it is the resulting overvaluation implied by current prices.

    A Terminal PE of 20 is IMO a fair choice (not too pessimistic).

    An Optimistic valuation suggests that a market Cap in the lower $2 billion region is more appropriate than the current one of $3.181 billion.

    Under more restrictive (pessimistic) assumptions (Terminal PE of 16 and unchanged Market share), the resulting fair Market Capitalization is in the lower $1 billion region (almost 66% below current levels).

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

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