3D printing announced plans to merge with Israel’s Objet,

By: Ian Shaffer

3D printing making inroads Technology is being used in the auto, aviation and defence industries

Imagine that you saw a pair of shoes you liked and, instead of going to the store to buy them, you could simply turn on your computer and print them.

3D printing technology has already begun to disrupt the traditional manufacturing process, and recent innovations have made it possible to quickly and simply produce 3D objects from home. 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) are helping to revolutionize this industry.

Like sculpting a statue, the manufacturing of goods often starts with a block of material. Material is gradually removed using tools or machines until it reaches the shape and size of the desired product. This is known as a subtractive process. 3D printing, or additive manufacturing, works in reverse.

Instead of eliminating material, the printer progressively dispenses it, layer by layer, until a fully formed product is created. These machines produce objects that are modelled by specialized computer software and can print using almost any material, including rubber, plastic and metal.

The 3D printer was created in 1986 by Charles Hull, the founder of 3D Systems. The technology enabled engineers and designers to quickly turn concepts into inexpensive and functional prototypes.

Today, 3D printing is being implemented in the automotive and aviation industries, as well as in such sectors as defence, architecture, industrial equipment, sporting goods and consumer products.

Notable breakthroughs have also been made in the medical field. In 2002, scientists printed a functional kidney using 3D technology, and this year, doctors successfully customized and implanted a 3D-printed prosthetic jaw into an 83-year-old woman.

With Hull as its chief technology officer, 3D Systems has become the industry leader. The company’s technology has been used to create car parts, jewelry, children’s toys and even prosthetic limbs.

The company recently started shipping a consumer-targeted 3D printer called the Cube. The printer sells for $1,300, and its plastic material cartridges cost approximately $50 each. Once a printer is purchased, the material cartridges generate recurring revenue for the company.

At Friday’s close of $42.54, 3D Systems had a market value of $2.4 billion. The company recently announced quarterly earnings that exceeded analyst estimates. Its stock trades at a multiple of 28 times 2013 earnings estimates, while the company is anticipated to increase revenues by 24 per cent next year.

Stratasys, 3D Systems’ primary competitor, was founded in 1989. Like its rival, Stratasys’s printers can create a wide variety of products. NASA is using its 3D printers to design complex parts for its next Mars rover.

This year, the company announced plans to merge with Israel’s Objet, a 3D printing company with complementary technology. While the deal is under review by U.S. regulators, if consummated, the merger would make Stratasys a formidable challenger to 3D Systems’s industry lead.

Stratasys is also expected to increase revenues by 24 per cent next year, without Objet’s potential contribution, and has a market value of $1.3 billion. Like 3D Systems, Stratasys recently reported quarterly earnings that beat analyst estimates. However, at Friday’s close of $59.20, the stock is trading at an expensive multiple of 37 times 2013 earnings estimates, implying that the market may be pricing in the synergies of the potential merger.

As a whole, the 3D printing industry is expected to generate sales of $1.3 billion in 2012, and this figure is projected to quadruple to $5.2 billion in 2020. While we expect 3D Systems and Stratasys to be major beneficiaries of this growth, we are not buyers of either stock just yet. The 3D printing story is still only in its early stages and we will be more comfortable owning these stocks once the technology gains more mainstream acceptance.

We are very cognizant of the fact that many compelling industries, such as biometrics, fuel cells, wind and solar power, did not produce many long-lasting profitable companies even though they started strong.

However, we will continue to monitor both 3D Systems and Stratasys with great interest. Although 3D printing may be the future, the future may not yet be upon us.

Ian Shaffer is a portfolio manager and the president & CEO of Galliant Capital Management, which manages investment funds and individual client accounts. Ian can be seen regularly on BNN’s Market Sense. He can be reached by phone at 514-788-5544 or by email at ishaffer@galliantcapital.com.

 

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