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Morningstar | Raising FVE After Stratasys Manufactures Solid 3Q

We are raising our fair value estimate for no-moat Stratasys to $24, from $23, on the heels of solid third-quarter results and revised 2018 guidance. Our updated valuation includes higher gross profit margins stemming from Stratasys’ products unit, which concluded the quarter with gross margins near 56%, above the implicit run-rate we initially expected (54% for 2018). We now assume product segment gross margins will finish the year at about 55.5% and drive company-wide gross profit margins above 49%, about 110 basis points above gross profit margins in 2017.

We were encouraged enough by growth in Stratasys’ services unit to raise our full-year revenue forecast for the segment from $199 million to a little under $210 million, but lower growth assumptions for the products unit brings our 2018 consolidated revenue forecast to $674 million, which falls between management’s new range of $670 million to $680 million. Stratasys booked 10% year over year revenue growth in its service segment on improved performance from direct manufacturing and growing customer support revenue. Per management, Stratasys’ service revenue improvement rests on a confluence of factors, but mainly growth in its installed base of systems and improved service contract attach rate.

Management lowered the mid-point for its 2018 revenue guidance but raised its expectations for adjusted earnings per share up to $0.50 to $0.55, above previous guidance of $0.30 to $0.50. After updating our model for management’s latest guidance and third quarter results, we now expect Stratasys to turn in adjusted earnings per share of $0.51. Our $24 fair value estimate reflects improved cost control, a cash-rich balance sheet, and new product offerings, and we also assume that rising threats from looming product launches and competitors, including HP and Carbon 3D, will arrest near-term growth.