Monday, June 6, 2011

Stratasys (Nasdaq – SSYS) , 3D Systems (NYSE: DDD) — The revolution will be printed

Stratasys, Inc. (SSYS $34.00) and 3D Systems Corporation (DDD $18.50) are leading companies in the emerging direct digital manufacturing (“DDM”) field. Both companies develop, manufacture and sell machines capable of what is being called “3D printing.” But this is not printing in the traditional sense. The machines construct finished 3-dimensional parts using a variety of materials including polymers, ceramics and metals. The technology has existed for decades, but these two companies are trying to push what was once a fringe niche closer to the mainstream.

Both companies have users in numerous sectors, including transportation, healthcare, education and recreation. And while the companies’ machines are able to fabricate end-line products, many companies are using the printers as lower-cost alternatives for prototype manufacture. A user can design a computer generated 3D model using CAD, and the machine will use the digital model to accurately build the design. Here is a demonstration of the Fortus 900mc, one of Stratasys’s leading models.

The end result from each company’s product is similar, but there are fundamental differences in how those ends are reached. Lasers are the biggest difference between the two lines. Stratasys’s machines are laser-free, which the company claims cuts down on costs because users mustn’t worry about expensive laser replacement. Instead of lasers, Stratasys uses a fused deposition modeling (“FDM”) head, which heats the material to near liquid and bonds the 3D model together, one thin layer at a time. The company also touts its products’ “set and forget” capability, allowing employees to perform other tasks while the machine works.

3D Systems claims its laser-based printers can achieve higher accuracy and detail. They also allow the company to price its units cheaper, with printers starting at $1,300, compared with Stratasys’s most affordable option at $10,000. However, there is concern that 3D’s cheaper models are more trouble than they’re worth. 3D Systems also demands that users buy consumable materials directly from them. Users who buy third-party will have warranties voided and service contracts revoked. The company is currently involved in an antitrust suit, with legal expenses totaling an estimated $7.5 million last year.

The companies’ main competitors are each other, but each is also contending with existing production methods. Each must prove its worthiness not only in the DDM field, but as a viable means of manufacturing. Recently, two new competitors emerged. General Electric announced its intention use the technology to manufacture parts for airplanes and ultrasound transducers. The European Aeronautic Defence and Space Company (“EADS”), the parent company of Airbus, also is attempting DDM airplane parts. The two hope to use DDM to produce parts in volume similar to conventional engineering. A company of GE’s or EADS’s size taking this step validates Stratasys’s and 3D Systems’s work in the past 30 years.

Stratasys has engaged with other companies to expand its sales. The company is designing and manufacturing machines in conjunction with Hewlett-Packard. The printers are adorned with the HP logo, and sold by HP. Because of the agreement, Stratasys is selling the printers to HP for wholesale, meaning their margins will be smaller. They hope to offset that by selling more printers. The agreement with HP is year-to-year, and is automatically renewed each September 30 assuming neither party terminates the agreement. Stratasys believes the agreement can be lucrative, but is proceeding cautiously because of the tenuous nature of the partnership. The company has also entered into an agreement with an unnamed Fortune 500 company which provided $3.5 million in R&D expenses.

Both companies’ earnings and revenues are increasing, but the stock prices are too high to suggest buying. A cover story by The Economist in February might have gone too far in illuminating the companies. Stock prices surged after the magazine article, but these prices seem an embellishment of what’s actually happening for each company. Earnings for both companies are estimated to increase 50% in 2011, and 3D Systems’ revenues could increase by as much as 40%. Since the technology is breaking into markets across the world, either of these stocks would be worth a second look were prices to drop. Experts believe Stratasys is building better products, but 3D Systems should hang in thanks to its lower prices. Stratasys is headquartered in Eden Prairie, MN. 3D Systems is based in Rock Hill, SC.  (Please refer to our "Accounting Notes" section for an explanation of the adjustments we make to GAAP financial results.)

(Click on image to enlarge)

(Click on image to enlarge)

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