Report
Keith Schoonmaker
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Morningstar | Maintaining 3D Systems FVE After Manufacturing Shortcomings Stymie 3Q Results

No-moat 3D Systems lost about a quarter of its market value after third-quarter results failed to meet market expectations. This quarter didn’t follow up on stellar second-quarter results that featured both sequential and annual revenue improvements in products, materials, and services. According to management, sequential revenue declines were partially due to 3D Systems’ inability to meet robust metal printer demand with its current manufacturing capacity. Management doesn’t plan to benefit from enhanced manufacturing capacity until 2019. Sequentially, revenue in products, materials, and services fell 9%, 11%, and 2%, respectively. We believe the market’s reaction to today’s release was overblown and we are maintaining our $14 fair value estimate and no-moat rating after updating our model. Shares are now roughly fairly valued in our view after trading off over 28%.

Though third-quarter results included soft revenue growth, we don’t believe our full-year revenue and gross profit assumptions are in jeopardy. What’s more, we didn’t find anything in 3D Systems’ third-quarter results that changes our long-term thesis. We still expect operating margins will gradually improve through our 2027 midcycle year, reaching 16%, and our forecast implies gross margins expand from 47% in 2017, to slightly over 52% by our midcycle period as 3D Systems accrues higher margins from rising materials and services use.

In the third quarter, gross profit margins finished a little over 47%, marking an increase over the 37% in the third quarter last year, but a decline from the 49% posted last quarter. We concur with management’s assessment that profit margins will finish the year stable and we model materials growth accelerating into 2019, offsetting lower margins from printer and product growth. Assuming management maintains its $78 million operating cost run rate through the remainder of 2018, we expect 3D Systems net profit margin will expand by about 300 basis points over 2017.
Underlying
3D Systems Corporation

3D Systems is a holding company. Through its subsidiaries, the company provides 3D printing solutions, including 3D printers for plastics and metals, materials, software, on demand manufacturing services and digital design tools. The company's solutions support applications in a range of industries and verticals, including healthcare, aerospace, automotive and durable goods. The company's healthcare capabilities include simulation, Virtual Surgical Planning (VSP?), and printing of medical and dental devices, models, and surgical guides and instruments. The company provides 3D printing technologies including Stereolithography, Selective Laser Sintering, Direct Metal Printing, MultiJet Printing and ColorJet Printing.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Keith Schoonmaker

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