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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
  • Implications Of Declining Growth Rates At DDD 1 comment
    Apr 30, 2013 2:36 PM | about stocks: DDD

    DDD generates Revenue from 2 Business Segments:

    1 Product (Printers & Material)

    2 Services

    In both segments the Annual rate of growth has been deteriorating and will not be able to meet the expectations priced in the Current DDD PPS.

    Revenue Growth Rate Charts:

    To Compute the Net Profit the following formula can be used (see Blog Post):

    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

    Assuming a 25% Tax Rate and no New Debt:

    NET INCOME = (OPERATING INCOME -17.50) X 0.75

    If the Revenue Growth rates do not deteriorate further, by December 2019 DDD will generate about $450'000'000 in Net Income.

    At a PE of 20, this would result in a Market Capitalization of $9 billion by 2019. Given the specific Cost of Capital (CAMP based) of DDD, DDD current Discount Factor for 2019 values is 2.1765.

    The Present Value of the Market Capitalization forecasted for 2019 is therefore $4.135 billion. The Current Market Cap is $3.57 billion. If Investors believe that the Revenue Growth rate over the next 6 years remain Constant (at current levels of 30%-35%), there is an appreciation potential of about 15%.

    However, if the current downtrend in Revenue Growth rates were to continue till 2015 and then stabilize (at 25%), DDD appears to be overvalued at present prices.

    This scenario sees a Present Value of the Market Capitalization forecasted for 2019 to be about $2.756 billion (23% lower than the Current Market Capitalization)

    If the current downtrend in Revenue Growth rates were to continue till 2015 and then stabilize (at 19%), DDD appears to be overvalued at present prices.

    This scenario sees a Present Value of the Market Capitalization forecasted for 2019 to be about $2.13 billion (40% lower than the Current Market Capitalization)

    If the current downtrend in Revenue Growth rates were to be replaced by an uptrend (till 2015 / and afterward reverting back to more sustainable levels) DDD appears to be undervalued at present prices.

    (click to enlarge)

    This scenario sees a Present Value of the Market Capitalization forecasted for 2019 to be about $4.45 billion (24.56% higher than the Current Market Capitalization)

    DDD appears to be fair-to-over valued (More likely overvalued).

    At a price of $50 and above is a pretty safe shorting Opportunity. Risk-affine Investors might Consider starting to short it in the $40 region (Especially if Next Quarter Results confirm the Downtrend in growth rates)

    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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    Author’s reply » Approaching my "Start to Short" level. 10-20% to go...
    6 May 2013, 10:23 AM Reply Like
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