COMMENTARY | COLUMNISTS | BRENT WILSEY

3-D printer stock risk not worth reward

The stock market had some troubles last week with some global concerns in Russia and Argentina. Economic data overall looks pretty good with the gross domestic product, or GDP, gaining 4 percent in the second quarter. This far surpasses the estimate of 3.1 percent; also, the first-quarter GDP was raised to -2.1 percent from -2.9 percent.

I was not surprised by this strong GDP number for the second quarter. As I had expected in the first quarter, inventory build was only $35.2 billion and rose nearly 3 times to $93.4 billion. Also for the first quarter, consumers stayed indoors far more than usual because of severe winter weather in the Northeast, and personal spending rose only 1 percent in the first quarter. But with the pent-up demand, personal spending skyrocketed 6.2 percent.

Also last week, consumer confidence came in at 90.9, which is the best level of the current recovery. Compare this number with the prior revised upward 86.4 and the estimate of 85.5. Consumers feel good about expectations going forward. I also saw that income expectations came in strong, as well.

Late last year and early this year, investors went crazy on 3-D printer companies, including 3D Systems Corp. (NYSE: DDD).

This stock nearly reached $100 per share in early January of this year. Currently, the stock has been cut in half, trading just over $50 per share. Late last year people I would talk to would say, “I think we need to buy a 3-D printing company,” and I would say, “Yes, 3-D printing is the future; the stocks of 3-D companies are all trading at levels that don’t justify the current fundamentals.” 3-D Systems has traded as high as $97 per share and a low as $43 per share over the last 52 weeks.

Even with the nearly 50 percent pullback in the stock valuation, ratios still are excessively high. The P/E ratio for the last 12 months is 132 times earnings -- compare that with the industry at 16.2. Looking at price to sales for the company, investors are paying a high valuation of 11.0 compared with the industry at 2.13. Price to book value is 14.0 versus the industry at 5.93. Same as the price-earnings ratio: The price to cash flow is very expensive at 77.0 versus the industry at 9.9.

3-D companies are seeing nice sales growth. 3D Systems Corp. saw sales increase by 48 percent over the last 12 months year over year; that compares to the industry average of 1.9. Unfortunately, earnings per share from the last 12 months year over year do not look as appetizing as a sales growth, earnings-per-share year-over-year decline by 6.8 percent when the industry saw an increase of 63.7 percent.

When investing in a high-risk company, it is at least nice to see a good balance sheet. The current ratio for 3-D systems is 4.5 -- far higher than the industry at 1.5. This does show investors that the company has a high degree a liquidity to pay their bills. Debt to equity also favors the company at 2.0 far below the industry at 29.7. The company does have a return on equity of 5.80 but that is no comparison for the industry average of 24.4. The net profit margin is also respectable for the company at 7.7 percent compared with the industry at 13.1 percent. While the net profit margin is not as high as the industry, I was surprised to see a profit margin that was well above zero.

When it comes to efficiency, I did see some concerns. First, receivable turnover over the last 12 months was 4.8 times for the company versus 7.6 times for the industry average. Inventory turnover could also be a problem at 4.1 times over the last 12 months -- well below the industry turnover of 15.0.

Estimated earnings per share based on the mean of 22 analysts for the year ending December 2014 are 81 cents per share. This climbs to $1.19 per share for the year ending December 2015.

With 21 analysts for December 2015, the range was rather high, with a low estimate of 91 cents per share and a high estimate of a $1.49 per share. With this high of a range I don’t have a lot a comfort on the $1.19 per share estimate earnings for December 2015.

With the stock trading at current levels of about $50.50 per share, the forward PE is a rather eye-popping 42.4. I didn’t see any comfort from the peg ratio, which is the price earnings divided by growth coming in at 3.15.

So while it appears the economy and businesses are doing well and 3-D printers are the wave of the future, I still believe the risk of investing in such high-valued stocks is not worth the reward.



Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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