This Just In: 3D Systems Corporation Gets Downgraded (But Should You Care?)

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Speaking of the best...
Investors in 3-D printing star 3D Systems Corporation  (NYSE: DDD  ) are wearing sackcloth and gnashing teeth today, traumatized by the fact that Merrill Lynch just downgraded the company's stock to underperform from buy. But should they be?

According to Merrill, 2014 is the year that organic growth will peak at 3D Systems Corp. While it's possible the company will continue to grow revenue in the years to come, investors are likely to see profit margin collapse as the company plays "catch-up" -- investing in niches where rivals ExOne (NASDAQ: XONE  ) , Stratasys (NASDAQ: SSYS  ) , and voxeljet (NYSE: VJET  ) have an edge.

More dangerous still, Merrill worries that 3D Systems will be tempted to "buy growth" -- spending money on acquisitions that will keep its revenue rising, but with little profit dropping to the bottom line. The Merrill analyst warned that if 3D Systems overpays for its acquisitions, or encounters difficulties integrating its new prizes into its own business, the revenue growth the company enjoys could come at the cost of dwindling profit.

To Merrill, this all adds up to a strong case for selling the stock, and taking what profit remains after 3D's stellar 2013 performance and this year's 20% decline. But is Merrill right?

Let's go to the tape
Yes. Merrill Lynch may very well may be right.

Here at Motley Fool CAPS, we've been tracking the performance of this banker's stock picks for close to eight straight years now. We've discovered that over the course of more than 950 buy and sell calls, Merrill has racked up a record of outstanding performance relative to its peers. On average, nearly 54% of its recommendations turn out right. (A 54% accuracy rating is harder than it looks. It's good enough to outperform about 95% of the investors on the planet.)

Merrill has also outperformed the S&P 500 by a good 21 percentage points per pick over the last eight years. A few examples:

 

Merrill Lynch Says:

CAPS Says:

Merrill Lynch's Picks Beating (Lagging) S&P By:

3D Systems

Outperform

***

32 points

Stratasys

Outperform

****

13 points

Hewlett-Packard

Outperform

**

(64 points)

Prior to making today's underperform call, Merrill Lynch soundly outperformed the market with its prior endorsement of 3D Systems. It's beaten the market with 3-D printing rival Stratasys as well -- underperforming only when it comes to a company tangentially related to the 3-D printing sector, former Stratasys partner Hewlett-Packard.

In short, if you're going to take advice from any professional banker on whether to buy or sell 3D Systems, Merrill Lynch is probably a good place to start.

One final thought
This is doubly true in the case of 3D Systems, where the stock's valuation is so distressingly high already. Priced at an astounding 172 times trailing earnings, and a nearly as expensive 166 times free cash flow, 3D Systems isn't just priced for perfection. It's priced beyond perfection.

Even if everything goes right for this stock, even if 3D Systems succeeds in growing earnings at the nearly 20% annual rate of growth that Wall Street projects, there's just no way a stock with a double-digit-growth rate deserves a triple-digit P/E.

3D Systems is overpriced, and I believe Merrill Lynch is right that it will underperform the market. 

3-D printing stocks won't be overvalued forever
For the first time since the early days of this country, we're in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3-D printing. Although this sounds like something out of a science fiction novel, the success of 3-D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.


Read/Post Comments (10) | Recommend This Article (3)

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 February 24, 2014, at 7:37 PM, aerialist wrote:

    Hmmm. 46% of the time Merrill Lynch is wrong. If I flipped a coin enough times statistically I would be right 50% of the time.

  • Report this Comment On February 24, 2014, at 11:39 PM, brandonchen wrote:

    What is the point of your article here? Are you talking about the buy/or sell case of DDD? Or are you publishing a Starmine article judging Merrill's performance? Its hard to understand...

  • Report this Comment On February 25, 2014, at 12:49 AM, Flyinghorse wrote:

    Do not make any sense from this article.

  • Report this Comment On February 25, 2014, at 1:01 AM, ScottAtlanta wrote:

    Can logical / linear models apply to exponential technologies? Maybe not.

  • Report this Comment On February 25, 2014, at 2:48 AM, wildeweasel wrote:

    56% correct is statistically no better than flipping a coin, the closer you get to being 100% correct the exponentially more difficult it becomes. I am sitting at >85% proven right now, so I will just hang on to my DDD shares and add if they drop again.

  • Report this Comment On February 25, 2014, at 4:18 AM, Pietrocco wrote:

    Rich,

    We agree: DDD is massively overvalued.

    However, it was Bof A that you were referring to, not Merrill Lynch!!

  • Report this Comment On February 25, 2014, at 8:51 AM, jonpuri wrote:

    Sell DDD just because BOA down graded and it is right 54% of the time ? Does it sound "Foolish" ? TESLA is overvalued too and there is no stopping going higher and higher. I thought you were going to analyse the reason behind the downgrade and not your verdict if BOA could be right !

  • Report this Comment On February 25, 2014, at 9:04 AM, TMFDitty wrote:

    Not "just because." Because (1) BofA/Merrill Lynch has a record better than 95% of investors tracked on CAPS, (2) the bank has a more limited, but still 100%, record of beating the market on its two previous 3-D printing recommendations -- or 67% if you count HPQ, and (3) objectively, the numbers suggest the stock is severely overvalued.

    Note: This is my opinion only. Not necessarily (or even ordinarily) reflective of the opinion of other Fools, or of Fool newsletters.

  • Report this Comment On February 25, 2014, at 4:45 PM, Fauvist39 wrote:

    Not because somebody downgraded it, but because of factors like the cash flow issue mentioned in this post and the disturbing post I read yesterday about disregard for buyer satisfaction, I am moving my money to a different 3D Printing stock, probably SSYS. I am happy pay for this switch with profits from a two-bagger holding (in my case). I will still be invested in 3D technology, I guess the flags about DDD look redder to me than to some other Fools. For their sake, I hope they are smarter and righter than I am. Oh, by the way, 56% is definitely a significant difference from 50%. ;)

  • Report this Comment On February 26, 2014, at 1:08 PM, TMFDitty wrote:

    66.67% accuracy isn't too shabby either, Fauvist39. Kudos.

    And Fool on!

    TMFDitty

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