Sunday, January 6, 2013

Proto Labs ( NYSE - PRLB ) -- Living in the Material World

Proto Labs (PRLB $38.00) is the leading provider of quick turn manufacturing services.  Engineers rely on the company to create prototypes with the actual materials and performance specifications their designs require ("real parts").  Proto also sells low volumes of custom parts to support initial pilot production and to facilitate products with a limited market.  The company specializes in computer numerical control ("CNC") machining and injection molding.  Customers provide 3-D computer-aided design software files via the Internet, which Proto loads into those machines to provide rapid turnaround times.  A wide range of machines are available.  The trick that separates Proto from its competition is the ability to evaluate incoming designs with a library of proprietary algorithms to make sure the part can be produced as expected.  That software often suggests improvements, helping customers fine tune their designs.  The ability to automate that process lowers costs by eliminating labor costs.  The interactive software additionally helps marketing.  Once a line of communication is established the company can cost-effectively maintain that dialog, nudging customers along.  Competition is provided by 3-D printers and other additive manufacturing techniques that produce facsimile parts.  Machine shops with similar tools also compete for the business.  Proto's interactive software and analytics generally provide faster results at lower costs. 

New materials are expanding Proto's potential market.  A series of new plastics were introduced in 2012.  Stainless steel, magnesium, and copper also were launched for use in the CNC segment.  The range of machinery at the company's facilities was broadened, as well.  The new materials already have begun to accelerate Proto's overall growth rate.  Demand for the company's historical materials is continuing to widen, moreover, as new customers are added and existing users expand their use of Proto's services.  About 75% of sales are made to repeat customers.  The new materials promise to help Proto reach a larger share of the prospective market, which remains in an early stage of development.  Geographic expansion also is likely.  Proto currently focuses on North America and Europe.  More emphasis on emerging markets is likely in future years.

The trend towards personalized manufacturing could amplify results over the long haul.  Tighter software integration between engineering and manufacturing, along with more versatile production methods, is likely to facilitate greater customization.  Consumers are likely to enjoy a greater selection of features, even in fairly complex and expensive products.  Manufacturers are likely to embrace more options as a method for increasing market share; perhaps total industry sales.  Producers may take some of that incremental production in-house, same as they do now.  But Proto's overall market could widen dramatically, nonetheless.

Meantime, expansion of the customer base combined with the availability of new materials and services promise to keep growth at a superior level.  We estimate 2012 sales advanced 26% to $125 million to provide income of $1.00 a share.  Shares outstanding rose 24% last year due to the company's initial public offering.  This year sales of $155 million (+24%) appear achievable.  Earnings could reach $1.25 a share.  In 2-3 years earnings could attain $2.15 a share on sales of $250 million.  Applying a P/E multiple of 25x suggests a target price of $55 a share, potential appreciation of 45% from the current quote.  The stock price already reflects much of Proto's 2-3 year potential.  Conservative investors are advised to wait for an entry point with more attractive risk reward characteristics.

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