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Morningstar | Stratasys Prints Earnings Beat and Sends Shares 7% Higher; Maintaining FVE

Shares for no-moat Stratasys jumped 7% after second-quarter results beat consensus expectations. We're maintaining our fair value estimate following management's unchanged guidance and this quarter's results. Revenue met our expectations, finishing at $170 million and flat compared with the second quarter last year, as ordering patterns returned for aerospace, automotive, and government products. Product revenue slipped 2%, from the prior-year period, while service revenue rose 6%. For the quarter, Stratasys benefited from high-end production solutions improvement and solid demand for production-focused products like the J700 Dental 3D Printer.

As expected, R&D expenses rose nearly 5%, with increased investments in new metal printer technology, and in conjunction with higher SG&A, Stratasys' adjusted operating margins slipped 28 basis points over the year. Our full year adjusted operating margin forecast remains intact at over 5%. And, we still expect Stratasys to generate positive GAAP operating margins beginning in 2020, with midcycle margins settling slightly higher than 13%. We expect revenue growth will offset rising operating expenses and average 5% over the next 10 years, higher than the 4% average decline recorded over the last three years.

Management maintained its 2018 guidance range of $600 million to $700 million for revenue and $16 million to $27 million for adjusted net income, or $0.30 to $0.50 per share. We estimate full-year revenue for 2018 will finish at $678 million, fueled by demand recovery and new product introductions. While our $23 fair value estimate reflects improved cost control, a cash-rich balance sheet, and new product offerings, we also assume rising threats from looming product launches and competitors, including HP, and Carbon 3D will arrest near-term growth.