3D Systems Corporation (DDD) Executing Well

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JPMorgan analysts Paul Coster, Mark Strouse and Paul J Chung rate 3D Systems Corporation (NYSE:DDD) as a Neutral as they provide an earnings preview.  They look ahead to 3D Systems’ earnings report on February 28th.

3D systems guidance for 2014

Earlier in the year, 3D Systems Corporation (NYSE:DDD) issued guidance for 2014 that aligned with, and reinforced, consensus’ revenue growth forecasts; however, the company has moderated earnings expectations owing to elevated investment activity that should weigh on operating expenses. We believe the company is executing well on its growth opportunity, rapidly introducing new products and services, opening up new addressable markets, acquiring bolt-on technologies. On the other hand, 3D Systems is trending toward an operating model (margin structure) that is disappointing relative to earlier expectations, in our view. The stock trades at a premium to Stratasys, Ltd. (NASDAQ:SSYS); although 3D Systems’ diversification provides an arguably larger addressable market, the company is also relatively less focused on the higher-margin professional market and the execution challenge is therefore daunting. We rate 3D Systems Neutral. Our price target is $54; we think the stock is now overvalued despite strong fundamentals.

3D Systems Corporation (NYSE:DDD) will report 4Q results on February 28. The conference call will begin at 9am ET.

Estimates for 4Q13 and FY14 align with the preannouncement

We look for 4Q13 PF EPS of $0.19 on revenue of $154.6mm, aligning with implied guidance of $0.17-$0.21 on ~$155mm (Street: $0.23/$155.1mm). We expect 4Q PF operating margin of 14.8%. We look for FY14 PF EPS of $0.85, flat y/y, on revenue of $685.6mm, up 33.6% y/y, aligning with guidance of $0.73-$0.85 on revenue of $680-$720mm (Street: $0.90/$695.8mm). We look for FY14 PF operating margin of 17.1%.

3D Systems valuation

3D Systems Corporation (NYSE:DDD) is trading at a multiple of 56.4 times CY15E PF EPS, which looks fully valued to us, set against a forecast three-year EBITDA CAGR of 26%. We believe that this company is doing an excellent job of capitalizing on a very large 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. Our YE14 price target is $54.00 based on a multiple of 40 times CY15E PF EPS of $1.35, a multiple that reflects strong demand for this growth stock. Though 3D Systems stock is trading above our 2014 year-end price target and seems richly valued, we do not recommend selling positions; we look for pullbacks as long-term buying opportunities.

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