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Morningstar | Stratasys Triggers a Sell-off with 2019 Guidance and 4Q Results

No-moat Stratasys triggered a sell off with fourth-quarter results and discouraging 2019 guidance. Its full-year outlook featured underwhelming revenue expectations of $670 million to $700 million (flat to up 6% versus 2018), and marginal growth in the first half of 2019 after accounting for divestitures. We lowered our full-year top-line growth for 2019 to 2%, from 3%, on expectations that legacy products will continue underperforming until new product launches in 2020 kickstart growth. That said, we maintained our $20 fair value estimate after updating our model, and the shares remain overvalued despite sliding more than 12%.

Compared with the fourth quarter last year, revenue declined 1% on weak demand from European automotive manufacturers in prototyping and tooling markets and government shutdown headwinds. A 2% decline (after divestitures) in Stratasys’ product segment underscored most of the top-line decline, while consumables and services registered increases of 1% and 7%, respectively, over the same period in 2017. Stratasys continues to see success in its high-end PolyJet and FDM hardware, which gross margins reflect. We maintained our midcycle gross profit margin forecasts (42% for services and 57% for products) after margins were flat with last year’s final quarter and product margins suggested stable average selling prices for new hardware and associated materials.

Management’s latest guidance includes higher R&D spend as a percent of sales and materially higher capital spend in 2019. We raised our forecasts for R&D expense in our model by about $5 million for the year on Stratasys’ plan to bolster complementary materials offerings. We also previously modeled capital spend in line with the 2016-17 period (4% of sales), but management’s latest guidance suggests capital outlays will fall between $45 and $60 million, above the $30 million we originally expected. As such, we now model capital expenditures closer to 7% of sales (above $45 million).

We continue to expect modest growth from Stratasys as it enters 2019, with its search for a long-term CEO still underway. We expect looming product launches will offer some respite but its position in markets like metals and production applications doesn’t instill confidence and leads us to believe growth will lag the industry’s double-digit average.