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Tuesday's Top Upgrades (and Downgrades)

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This series , brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we turn our focus to investment megabanker Credit Suisse, which this morning initiated coverage of the 3D printing industry -- and spread the whole gamut of possible ratings out among the three major players: ExOne (NASDAQ: XONE  ) , Stratasys (NASDAQ: SSYS  ) , and 3D Systems (NYSE: DDD  ) .

Let's start with Credit Suisse's most pessimistic note, and we'll move up from there.

Beginning at the bottom: ExOne
 ExOne is Credit Suisse's first pick in the 3D-printing industry -- and it's picked to "underperform" the market. Priced at more than $51 per share today, Credit Suisse sees ExOne shares falling to $48 the next year.


Focusing intensely on the industrial market, and leaving consumers to its rivals Stratasys and 3D Systems, ExOne says its process for 3D parts-printing offers the fastest volume production  of anyone out there. In return, ExOne also charges prices far in excess of what its rivals' cheaper machines cost -- $100,000 and up, to as much as $1.4 million per unit for ExOne's top-of-the-line S-Max printer. Unfortunately, ExOne's shares look almost as pricey as its products.

ExOne is nprofitable today, and selling for 82.5 times next year's projected earnings (versus upper-30s P/Es for Stratasys and 3D), making it easily the most expensive 3D-printing stock out there today. Granted, investors are probably paying so much because the company's growth prospects seem so bright -- analysts quoted on S&P Capital IQ have ExOne pegged for wildfire 71.5% annual profits growth over the next five years. 3D Systems and Stratasys, in contrast, are both expected to grow less than half as fast -- 28% and 30% annually, respectively.

Still, with ExOne unprofitable today, and burning cash to boot, investors should take projections of the company's profits "growth" with a few grains of salt. If you've passed fifth-grade math, you probably remember that any time you "grow" a negative number, it just gets more negative.

Moving on up: Stratasys
 Looking up one rung on Credit Suisse's ladder of respect, we find Stratasys initiated at a "neutral" rating, and a $103 price target.

On the one hand, calling Stratasys "neutral" appears to do the company an injustice. The stock costs less than $96 today. Shouldn't the prospect of a move 7.5% higher justify a "buy" recommendation?

However, Stratasys looks rather expensive, too. It carries a cheaper "forward" P/E ratio than does ExOne, but here in the present, Stratasys is just as unprofitable as is ExOne -- and it's actually burning more cash than its upstart rival.

Over the past year, Stratasys posted negative free cash flow  of $28.3 million, which is more money than it admitted to losing under GAAP accounting standards, and more than twice the $11.2 million in free cash flow that ExOne burnt.

Even if Credit Suisse is somewhat optimistic about where Stratasys's stock price could go over the next year, the fact that Stratasys is unprofitable, and costs more than 11 times annual sales, suggests there's at least as much downside as upside to this one. Credit Suisse is right to be cautious.

Last but not least: 3D Systems
 I've found a lot to like about 3D Systems lately, I admit -- and Credit Suisse says this one is its own favorite 3D-printing stock as well, giving 3D Systems its only unqualified "outperform" rating in the industry. But that doesn't mean you should necessarily buy the stock. It doesn't mean Credit Suisse is right that 3D Systems is heading to $62 within the next year.

Sure, it would be nice to see a $10 run (from $52 to $62) over the next 12 months. And 3D Systems looks best-positioned to make a run of some kind. Alone among the 3D printing stocks, it's:

  • ... profitable today (having earned $40 million over the past year)
  • ... generating cash ($39.1 million annually )
  • ... displaying strong quality of earnings as a result
  • ... and bearing an actual, honest-to-goodness positive P/E ratio.

Still, despite all the factors in 3D Systems' favor, I have to admit that I shudder a little bit at the idea of paying 120 times earnings for any stock -- even one that's supposedly going to grow earnings at 28% or so over the next five years. I'm going to let Credit Suisse go long this one without me.

If I'm too nervous to actually short this stock just because it's overpriced, I'm still not brave enough to buy it.


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