3D Systems: Is M&A Still An Argument For The Bulls?

| About: 3D Systems (DDD)


We review in this article the recent takeover speculation.

And the group’s acquisition policy.

In our view, M&A is not an attractive exit opportunity for shareholders.

A takeover play? Not really

After 3D Systems' (NYSE:DDD) huge price drop year-to-date, we are pretty sure that the bulls will kindly tell us that 3D Systems cannot go much lower as it has strong M&A appeal. And they will probably remind us that just a few weeks ago, 3D Systems rocketed more than 20% following M&A rumors.

Let's have a closer look at the M&A scenario. Actually, takeover rumors emerged in late June when 3D Systems cancelled a Pacific Crest conference appearance. Last minute investor conference cancellations usually hint that something is happening at the company. It can be M&A talks (acquiring a large business, or seeking to sell the company). Or it can be an earnings miss or a profit-warning. And guess what happened just a few weeks after the appearance cancellation… A massive miss on Q2 earnings as detailed in our article.

In all, we believe that the recent rumors about a potential takeover of the company are unfounded.

We see no major takeover benefits for the potential predators

From a fundamental standpoint, we struggle to figure out why a large tech player such as HP (NYSE:HPQ) or Google (NASDAQ:GOOG) (NASDAQ:GOOGL) would try to acquire 3D Systems. The barriers to entry are gradually coming down as patents are expiring, making it cheap and relatively easy for any tech company to design a 3-D printer. This is perfectly illustrated by software maker Autodesk's (NASDAQ:ADSK) 3-D printing hardware initiative.

Obviously, Google could easily develop in-house its own 3-D printer thanks to its tech know-how and large financial resources while HP has a large printing patents portfolio, a huge distribution reach (businesses and consumers) and claims it has developed a breakthrough 3-D printing technology. So there is no need for either company in our view to acquire 3D Systems whose patents are gradually expiring.

And from a pure financial standpoint, the benefits of such a deal would not be obvious. 3D Systems is trading at 37x 2015 EPS vs. 18x for Google (for an earnings growth which is expected to be slightly above but which faces downside risks) and 9x for HP, suggesting that a deal could be EPS dilutive. In addition, HP would find it hard to justify such an acquisition to its shareholders, notably after the Autonomy disaster.

A M&A play? Clearly

It's no secret that 3D Systems has long been a serial acquirer of small businesses. Since raising more than $300m in June, the group has already announced two acquisitions, Simbionix and APP / APM. The question now is what impact future acquisitions will have on 3D Systems' earnings profile.

Assuming that 3D Systems acquires companies which post similar profitability levels at a 2015 Price/Sales ratio of 2.5x (vs. 5x for 3D Systems), we get to a potential 18% EPS accretion. As Simbionix has already been included in the guidance, we would say that potential EPS accretion is rather around 15%.

In all, M&A is likely to sustain earnings over coming quarters even if underlying performances are likely to continue decelerating in our view (see our article "It's Not Just About The FY14 Guidance, It's Also About The Long Term"). But as we said several times, investors' focus will remain on organic growth, not on absolute revenue and EPS numbers as organic growth is the main driver of long-term valuation models.

Adding stories to the house of cards is a major risk

We would also mention that many analysts and investors have already highlighted the integration risks related to 3D Systems' M&A frenzy and that some of them are close to calling 3D Systems a house of cards. And obviously, adding stories to the house of cards through M&A is unlikely to please them.

A house of cards usually falters when the underlying business weakens. If recent concerns about the 3-D printing outlook prove to be true, then 3D Systems will be the most at risk name within the 3-D printing universe.

In all, we believe that the group's acquisition policy is unlikely to sustain the stock price in the long run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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