2 Fast Growers at the Helm of Future Innovation

For the average individual investor, the manufacturing industry probably doesn't stir up a whole lot of intrigue. You probably envision old factories full of giant, rusty, soulless machines, with assembly lines endlessly laboring away to churn out some mundane widget when it's all said and done.

Well, that's all about to change: 3-D printing is here, and it's making manufacturing sexy again (let's not argue over whether it was ever sexy before -- the point is, it is now). 

Who uses it
You've probably heard of 3-D printing before, but if you haven't, it's exactly what it sounds like. And the process of designing and printing three-dimensional objects is beginning to catch on with automakers, defense contractors, and titans of industry alike. The technology is becoming so mainstream that even Tonight Show host Jay Leno uses a 3-D printer to replace custom parts for his hundreds of vintage cars. 

More importantly for us investors, even Boeing (NYSE: BA  ) is using the process. Aircraft, obviously, must be designed and built with the utmost precision -- there is absolutely no tolerance for failure. No failure? No problem for this groundbreaking technique; even consumer-grade 3-D printers can build in incremental layers just 1/10,000th of an inch tall.

Also known as "additive manufacturing," the process has been around for decades but is only now becoming market-competitive. Five years ago, a 3-D printer for personal use would have set you back $15,000. Now you can get one for $1,299. As it becomes cheaper and cheaper, savvy investors may want to watch out: Boeing has already put more than 20,000 3-D-printed components in its military products. Plus, Jay Leno probably isn't going to stop buying cars anytime soon.

So who makes these magical things?
There are only a few big players in the industry right now, but more are likely to emerge as the technology catches on. 3D Systems (NYSE: DDD  ) is the company behind "The Cube," the $1,299 personal 3-D printer, although the company currently depends more on corporate clients for business. The company's 10-K lists "automotive, aerospace, computer ... and defense" manufacturers, among others, as its main clients. In a burgeoning industry like this, you might expect sales to be concentrated among just a few customers, but no customer accounted for more than 10% of revenues in FY '11. 

While it doesn't list its clients by name, it wouldn't be surprising to learn that Tesla Motors (Nasdaq: TSLA  ) would use the services of a company with the expertise of 3D Systems. Three reasons make Tesla a likely early adopter:

1. Tesla is cutting-edge itself, and not afraid to try new things.

2. Its products must be held to a high quality of precision, safety, and performance.

3. Tesla is not a pure volume-seller, like many of its competitors. Additive manufacturing is a boon (or rather, not an impediment) to the small-to-medium size business because it erases scale advantages -- there are no meaningful cost savings from making thousands of a custom part versus making a single one. 

The second major player in this new market is Stratasys (Nasdaq: SSYS  ) , which on Nov. 2 announced that it beat earnings estimatesin its most recent quarter (as did 3D Systems). 3D Systems seems to an extent to be pursuing the highly profitable "razor-and-blade" model, where the printer (i.e., the "razor") is sold to the customer, who then must continuously rebuy supplies (i.e., the "blades"), which are subsequently sold at absurdly high margins. 

Stratasys, which has mostly serviced industrial clients, fought 3D Systems' enviable position in the consumer market by seeking growth through the acquisition of its next-largest competitor, Objet, earlier this year. Rather than expanding into the consumer arena, where it has had little success to date, the Object deal should strengthen Stratasys' presence in health care, which was one of its core competencies to begin with, on top of being an area with unbelievably exciting potential applications down the line -- think printing human organs!

Don't snooze on innovation
At the end of the day, 3D Systems and Stratasys are two early entrants in a market likely to be at the center of a global manufacturing paradigm shift. Forget the days when manufacturing was thought of as simply the act of mass-producing low-quality gizmos. We stand at the helm of a new, more exciting age, and business is booming. 3D Systems earned nearly 70% more in the past 12 months than it did in the 12 prior, while Stratasys more than doubled its profits in the past year. So while you may not be able to print yourself a new kidney (not yet, anyway), these companies have a pretty good record of printing investors some money.

With the Greek debt crisis and slowing growth in China many investors are worried about heady growth going forward, but fear not, because: The Future is Made in America. Domestic manufacturing is poised to once again become the investment driver of the world, and all because of the powerful disruptive technology I've described above. You can uncover the three companies that will become the American Steel of tomorrow in our analysts' new free report. Just click here to read more.


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