Why 3-D Printer Arcam AB's Stock Popped More Than 12% Today

Large orders for metals 3-D printing systems are on the way, and Arcam could be in the running as a supplier, according to one Wall Street firm.

Mar 6, 2014 at 8:51PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

If you've been following the 3-D printing space, you know considerable daily swings in share price are par for the course in this hot sector. That said, shares of Sweden's metals 3-D printing specialist Arcam AB (NASDAQOTH:AMAVF) were particularly strong today, soaring 12.6%, to close the day at $35.55.

The impetus for Arcam's pop was surely Wall Street firm Jefferies' rating upgrade to buy from the hold that Jefferies assigned Arcam when it initiated coverage in mid-December. While Jefferies upped Arcam's rating, it simply maintained its price target of 300 SEK ($46.93, using today's conversion rate).

I don't always put a lot of stock (no pun intended) in analysts' ratings, as most analysts are notorious for being late to the party, as well as late to leave the bash. In this case, however, I'm onboard Jefferies' call.

Jefferies: Arcam has shot at large metals 3-D printing orders
Jefferies noted that its supply chain checks "indicate that 6-12 large industrial groups are in deep discussion with metal 3D printing companies on larger orders that will be integrated into existing production lines. We believe that GE, Stryker, JNJ, EADS, Airbus, BMW, Medtronic, and others are likely to place large orders in 2014." Jefferies is speculating that Arcam has a good shot at receiving new orders for its electron beam melting, or EBM, 3-D printing systems from one or more of these companies, stating that, "We believe that EBM can create products with titanium that surpasses any other process."

Stryker, Medtronic, and Johnson & Johnson are big players in the medical implant space, which is one of Arcam's two target markets. EADS and Airbus are in the aerospace industry, Arcam's other target market. General Electric, of course, has an aerospace division, and has received much press for its big push into 3-D printing, which I'll explore further below.

Currently, Arcam doesn't have customers outside its two target markets, to my knowledge, and there is more than enough potential business in those industries to keep it busy. So I don't view high-end automaker BMW as a likely potential customer. Additionally, titanium's high price precludes mass market automakers from using it in their production processes. That said, it's certainly within the realm of possibilities that a high-end automaker might include titanium components within one of its more upscale models.

My take: EBM and laser sintering are more complementary technologies
I agree with Jefferies' take that Arcam could receive new orders from one or more of the above-noted big companies and, in fact, have written positively about Arcam before Jefferies even initiated coverage.

However, I don't believe there is a blanket "best" technology to create all titanium products. EBM and laser sintering, which is the predominant metals 3-D printing technology, both have strengths and weaknesses, and should generally be considered complementary processes. The "best" technology largely depends upon the specifics of the titanium product being made, as well as how many of them are needed.

It's quite likely, in my opinion, that some very big companies will end up using both technologies. General Electric, which is the world's largest user of metals 3-D printing technology, is a good example. While GE now predominantly uses laser sintering, it also uses EBM, though there's been little written about it. GE's planned 3-D printing capacity ramp-up could very well include both technologies. For those not familiar with this topic, here's part of what I recently wrote:

In mid-2013, General Electric announced it planned to use 3-D printing to produce the fuel nozzles for its new Leap jet-engine, each of which will contain 19 nozzles. This is a huge undertaking, as GE needs to fabricate 85,000 nozzles for the engine orders it has in hand, and expects its annual production to eventually require 45,000 nozzles, according to a Bloomberg article.

The company's massive nozzle production goals would require it to buy at least 60 very pricey 3-D printers, which isn't cost effective. So GE plans to use current technology to ramp up its production while also working with supply chain manufacturers to develop new higher-capacity systems.

GE's reportedly been testing laser sintering systems from both 3D Systems and privately held Concept Laser. Given this fact and that Morris' facility is composed primarily of EOS's DMLS systems, it certainly appears GE plans to primarily use laser sintering technology in its 3-D printing ramp-up. It's worth noting, however, that Avio Aero, which GE acquired last year, has been a major buyer of Arcam's EBM systems for many years.

Given Avio's long-standing use of EBM, I'd imagine GE would likely stay the course on that front if Avio has been satisfied with the components its EBM systems have produced. Additionally, if Avio has been especially pleased, GE could well consider using EBM to produce other aerospace components that it needs.

Foolish final thoughts
There's no doubt that 3-D printing in metals to make production parts is in the early stages of what's likely to be a very big market. Arcam's sole focus on metals and its unique patented technology should certainly make it a strong candidate for some new large orders in 2014 and beyond.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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