Stratasys ( Nasdaq - SSYS ) -- New Products Fuel Surprising Q3

Stratasys (SSYS $30.00) reported better than expected Q3 results.  Earnings surged 81% to $.29 a share.  That figure excludes a loss of $.02 a share on the sale of an investment security.  Revenues climbed 31% to $39.7 million.  Stratasys is the leading producer of direct digital manufacturing printers that take CAD-CAM designs straight from a computer and make the part directly without any set-up.  The systems create their own molds on the fly and apply layer after layer of various plastics to create a finished product.  The machines come in a wide range of sizes and performance levels.  Low cost U-print and 3D printers typically are used by engineers to create prototypes.  Larger Fortis machines are employed in everyday manufacturing situations.

A joint venture with Hewlett Packard went haywire last year.  Stratasys signed up H-P to distribute its lower cost systems to the engineering market, where it already had a strong presence with blueprints, plotters, and an assortment of related products.  H-P has fiddled around with the technology in five small European countries to date.  Stratasys was hoping it would expand its efforts worldwide.  The hiatus in expanding the market caused sales of the less expensive machines to stall in 2011.  Fortunately, Stratasys maintained control over marketing its Fortis line for manufacturing applications.  Those sales are soaring.

A lower cost manufacturing machine achieved widespread penetration in Q3.  Stratasys also enjoyed rising sales of its consumables, particularly among its manufacturing customers.  A service business the company operates posted solid gains, as well.  A high end Fortis machine was introduced this year, moreover.  That unit is providing further momentum.

The near term outlook is unclear.  Stratasys obviously produced superior financial results in Q3.  But costs are expected to rise significantly in Q4 as marketing efforts ramp up to fill in the gap left by H-P.  Sales commission accelerators are likely to lift expenses, too.  We are raising our 2011 earnings estimate ($1.00 a share) by a dime to reflect the powerful Q3 showing.  But a large sequential improvement appears unlikely.

Margins may continue to be constrained in 2012.  Still, a 15% earnings gain to $1.15 a share appears achievable.  One of the company's few competitors, 3D Systems, recently announced lower than expected Q3 results.  So the overall climate may not be as robust as Stratasys' numbers might suggest on the surface.  The long term outlook remains bright, though.  The share price appears a little elevated at current levels.  If Q4 results stall a lower entry point might become available.

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