How Proto Labs Got More Awesome Last Quarter

Margins matter. The more Proto Labs (NYSE: PRLB  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Proto Labs's competitive position could be.

Here's the current margin snapshot for Proto Labs over the trailing 12 months: Gross margin is 60.4%, while operating margin is 27.7% and net margin is 19.1%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Proto Labs has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Proto Labs over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 60.8% and averaged 59.8%. Operating margin peaked at 27.7% and averaged 24.5%. Net margin peaked at 19.1% and averaged 15.8%.
  • TTM gross margin is 60.4%, 60 basis points better than the five-year average. TTM operating margin is 27.7%, 320 basis points better than the five-year average. TTM net margin is 19.1%, 330 basis points better than the five-year average.

With TTM operating and net margins at a 5-year high, Proto Labs looks like it's doing great.

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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool recommends Proto Labs. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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  • Report this Comment On April 20, 2013, at 7:44 AM, trim50 wrote:

    Anyone that buys this stock knows nothing about manufacturing. The value of this company is blow way out of line with reality because it is assumed to be associated with 3D printing and online part fabrication, however it really isn't. Real manufacturing companies have their own moulding capabilities in-house while intermediate size manufacturers use well established tool and moulders because it requires weeks and months to fine tune an injection moulded part no mater how good the tool maker is.

    Don't fall for the propaganda being pumped out by this company while the management unloads their shares to get rich while the getting rich is possible.

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