3D Systems Corporation (DDD) has lowered its 2014 earnings guidance dramatically due to falling margins and unexpected investment activity causing analysts to drop its 2014 price target, but there could still be solid buying opportunities if the market overreacts.
3D Systems revenue strong, but margins miss expectation
“This seems to be something of a trend in the 3D space; revenue surprising to the upside, but margins trailing off a bit relative to expectations,” writes J.P. Morgan analyst Paul Coster, who rated DDD as Neutral and reduced his price target to $54 from $67. DDD is currently trading at $62.10, down 15% after its disappointing earnings were released and down from $96.18 earlier in the year.
Carlson Capital's Double Black Diamond fund added 3.09% net of fees in the second quarter of 2021. Following this performance, the fund delivered a profit of 5.3% net of fees for the first half. Q2 2021 hedge fund letters, conferences and more According to a copy of the fund's half-year update, which ValueWalk has been Read More
DDD has given 2013 PF EPS guidance of $0.83-$0.87, compared to prior guidance of $0.93-$1.03 and a consensus of $0.97, even though revenue guidance is essentially unchanged and right in line with consensus ($513 million to $514 million).
“Significant investment in R&D, marketing and manufacturing weighed on earnings, but it looks as though sales were also a bit mixed with professional systems and materials performing well, on-demand parts and consumer fell short. We still think this move into the consumer segment is risky for DDD.”
Investments hurt margins now, but could drive future growth
Not everyone agree that the lowered guidance is really a problem, since the lower margins are the result of investments that could drive earnings in the future.
“Despite lower EPS outlook largely on higher opex, we see today’s weakness on F2014 guidance as a buying opportunity given the group typically trades on sales multiple, and revenue outlook for F2014 actually went above consensus,” write Canaccord Genuity analysts Bobby Burleson and Prabhakar Gowrisankaran, who rate DDD a Buy, though they also dropped its price target from $95 to $75.
Exactly how much these investment could end up driving future earnings seems to be the main point of contention between these two points of view. Coster acknowledges this, saying that DDD is “doing an excellent job of capitalizing on a massive and diverse market opportunity, justifying a premium multiple, but margins have generally lagged expectations and potential upside to revenue could be offset by a slightly disappointing end-state business model.”
While Coster sees DDD as being fully valued, he does see the potential for buying opportunities if multiple compression continues.