Three-D Systems’ (DDD.N) revolutionary 3-D printers started the 3-D printing craze. Since then, many competitors have carved out market share and now there seems to be less dimension to Three-D’s earnings. We wrote about the issues facing Three-D last year in this AlphaNow story, and since then the stock has been down more than 50%. Watch out, bottom fishers — there are still some cautionary signs.
The company saw demand slump at the beginning of the year, but dismissed it as a minor speed bump. Analysts have taken those comments to heart and lowered estimates. Three-D also scores poorly on the StarMine Earnings Quality (EQ) model with a score of 10, which leads us to believe that its earnings may not be coming from sustainable sources. Let’s take a look at some of the contributing factors.
Source: Thomson Reuters Eikon/StarMine
Poor returns
One of the factors we look at is operating efficiency, measured by return on net operating assets (RNOA). By this measure, Three-D’s earnings quality does not look great. RNOA has been falling steadily for the past four years and is now far below the industry median. In fact, for the first time, trailing 4Q RNOA turned negative in the last quarter at -0.4%.
Source: Thomson Reuters Eikon/StarMine
The backstory
This has been driven primarily by falling margins, as competitors have driven prices down. Operating profit margins have fallen from over 18% in 2013 and have turned negative in the latest quarter at -0.6%. That competition is only expected to intensify as the industry becomes more commoditized.
Source: Thomson Reuters Eikon/StarMine
Move the merch
Although Three-D has made several acquisitions that has led to an increase in inventory days, that steady increase is a sign that the company may not be moving as much product as it expects. In fact, on the last conference call, CFO Ted Hull recognized that inventory levels had risen due to weaker than expected sales and said that they “plan to reduce that over the coming periods.” Keep an eye on inventory days in the coming quarters. In a fast moving industry like this, there is a risk of obsolescence with inventory lying around.
Source: Thomson Reuters Eikon/StarMine
Low scores
In fact, Three-D performs poorly on almost all of the StarMine models that track institutional holdings (Smart Holdings), valuation (Intrinsic and Relative Valuation) and momentum (Analyst Revisions Model). With many of Three-D’s clients holding off on capital expenditures and in cost cutting mode, it remains to be seen if the company can regain (or print?!) its mojo quickly, or if the turnaround will be prolonged.
Acquisitions rarely provide the full extent of the anticipated synergies, often presenting unexpected integration issues. Recent acquisitions may provide a longer term benefit to Three-D Systems, but it may be at the cost of short term pain. It also remains to be seen how the company navigates tougher competition. The ink hasn’t dried yet on Three-D’s earnings report card.
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