Is 3D Systems the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if 3D Systems (NYSE: DDD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at 3D Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 14.4% Fail
  1-Year Revenue Growth > 12% 47.3% Pass
Margins Gross Margin > 35% 49.3% Pass
  Net Margin > 15% 10.3% Fail
Balance Sheet Debt to Equity < 50% 36.6% Pass
  Current Ratio > 1.3 3.73 Pass
Opportunities Return on Equity > 15% 9.8% Fail
Valuation Normalized P/E < 20 83.92 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With four points, 3D Systems doesn't quite make it to the middle of the pack on our 10-point scale. But investors couldn't be more optimistic about the company's growth prospects, with its shares having more than doubled over the past year.

3D Systems is at the forefront of a new cutting-edge technology: 3-D printing. Along with rival Stratasys (Nasdaq: SSYS  ) , which has also seen its stock skyrocket, 3D Systems allows its customers to make specialized products much more rapidly than shipping them from remote locations.

But 3D Systems isn't impervious to the slowdown in the economy. During better times, a list of clients that includes defense contractor Northrop Grumman (NYSE: NOC  ) and automaker Ford (NYSE: F  ) would be an unambiguous mark of success. But Northrop is dealing with the potential for slimmed-down defense budgets, and Ford is still navigating the impact of global macroeconomic trends on the auto industry. As a result, 3D Systems has to be concerned that its industrial clients, which will almost certainly represent a higher-margin opportunity than more consumer-oriented applications, won't have the financial strength to invest in 3-D technology.

The challenge that 3D Systems faces is figuring out how to avoid letting 3-D printing turn into a commodity business. That's what has crushed the traditional 2-D printer industry, with Hewlett-Packard (NYSE: HPQ  ) struggling to figure out a new direction that will let it escape the margin compression that competition from Lexmark and other printer competitors brought.

For 3D Systems to improve, it needs to focus first on beating Stratasys. Once that's done, higher margins and stronger returns on equity should let 3D Systems get a lot closer to perfection in short order.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

3D Systems may need Ford, but Ford definitely needs the innovations that 3D Systems and others can bring to the auto industry. Get an in-depth look at the automaker in the Fool's premium report on Ford, which includes high-density analysis on the stock's prospects and potential obstacles. Get your copy today and find out what you need to know.

Click here to add 3D Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Northrop Grumman and Ford. Motley Fool newsletter services have recommended buying shares of Ford, Stratasys, and 3D Systems, as well as creating a synthetic long position in Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2012, at 3:05 PM, colleran wrote:

    "For 3D Systems to improve, it needs to focus first on beating Stratasys." If 3D Printing were a mature technology, that would be true, but it assuredly is not. 3D Systems needs to focus on the same thing that Statasys needs to focus on, namely putting more and more value into their products. Also, the market for 3D Printers is changing all the time as people find new uses for the technology. I would focus on the market, not a competitor.

  • Report this Comment On September 10, 2012, at 8:24 PM, jonh1959 wrote:

    I joined the fool site after listening to a presentation about a stock that was recommended as a pick by mr Gardner. This pick was a stock that had been previously recommended by mr Gardner one of only four stocks that that mr Gardner had EVER recommended 2x. This intrigued me but to get the name of the stock and the report I had to join fool. Now I feel like a fool. The stock ddd.....down down down, I purchased right after I received the report. I may need to exercise my 30 day money back offer. The stock had a good run and may come back. I think the problem was that the report might have been 90 days old(not sure). Also I don't believe Mr Gardner owns the stock yet he recommend it 2x. If I'm wrong please correct me.

  • Report this Comment On September 11, 2012, at 2:33 AM, Risky88 wrote:

    ummmmm....hello?

    if your a Fool

    you don't hold for 90 days

    you hold for 2-5 years or more

    long term is not next month

  • Report this Comment On September 12, 2012, at 11:35 AM, barnsterb wrote:

    made good money from DDD, sold half my position a little while ago than bought it back after a pullback. I like the stock and I'm hanging long now.

  • Report this Comment On September 15, 2012, at 4:38 AM, scruffyishere wrote:

    Sometime in the early beginning of DDD the stock was only available through a Canadian stock exchange (in this case I believe Alberta), it originated out of Australia. It was back then 34 cents a share. DDD had at that point created a separate eye (you need 2 for 3-D and it was an Imax film that caught my attention). DDD had created the first 3-D film from a 2-D film.... what a wonderful creation. So I recommended it to my friends one of whom bought at least 20,000 shares for his older son and I'm not sure what he bought for himself. But..... I'm shocked to discover that the shares are now worth over 100 times the original price....did it ever split?

    One of my other picks was Panda Project. I'll bet not a single person remembers tthis stock out of Boca Raton. I recommended this stock a buy when it sold at $7/share it went to $52 or so dollars. Unfortunately I had no money to invest in either stock back then and I've been sad ever since.

    Unfortunate but true.

  • Report this Comment On September 15, 2012, at 6:29 AM, SATXUSA wrote:

    Collerans remark is right on IMHO. I will add that if they can keep focus on increasing revenues and margins they should continue to do well.

    How do they do that? By selling more and keeping costs down. The current CFO needs to keep that in mind obviously...

    Also if Chuck, the founder and current CTO leaves (as he is 72) This may cause a sell-off and some down-ticks, which could be a good buying point later on if the stock continues to rise.

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