Monday, February 18, 2013

Proto Labs ( NYSE - PRLB ) -- Margins Near a Peak

Proto Labs (PRLB $47.00) reported excellent better than expected Q4 earnings.  Sales were on target at $33.6 million (+31%).  Income widened 94% to $.31 a share.  That was $.07 a share above our estimate.  Fourth quarter results ordinarily are seasonally pressured due to the holiday season.  This year performance was impacted by weakening economic conditions in Europe, too.  Demand surged among U.S. customers, though, offsetting the headwinds.  Gross margins leaped 3% beyond the high end of Proto Labs' target range (60%-62%).  A portion of that was consumed by start up costs associated with several key new materials the company is introducing.  For the year income finished at $1.07 a share, up 19%.  Average shares outstanding rose 23% due to a pair of public stock offerings.

Margins could stay elevated.  Proto Labs manufactures small production runs for engineering groups and makers of specialty products.  The company is expanding the variety of materials it works with to deliver real parts customers can evaluate and use, not mock-ups like 3-D printers tend to make.  Orders fluctuate unpredictably, though.  While Proto Labs manages order flow with innovative techniques, invariably there are times when personnel are underused or required to work overtime.  Those expenses were on the low side in Q4 but are likely to stay in the expected range over the long haul.

Volume is mounting.  Existing customers are sending in more requests.  And new customers are being added with clever marketing techniques.  We are raising our 2013 earnings estimate by a nickel to $1.30 a share.  A stronger showing is possible if margins remain at an elevated level.  Above average growth appears likely to continue well into the decade.  Performance is not immune to poor economic conditions, though.  It's been four years since the last recession.  Another slowdown could interrupt Proto Labs' earnings progression.  Even a brief reversal could blast the stock price in light of its high P/E multiple.

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