3D Systems Corporation: 1 Likely Contributor to Its Stock Price Fall That You Might Not Be Aware Of

3-D printing stocks have been getting pummeled in 2014. 3D Systems (NYSE: DDD  ) , the sector's largest player by market cap, has been one of the worst performers, with its stock price cut in half since the start of the year.

Investors have likely sent 3D Systems' shares tumbling because they deemed the company's fourth-quarter 2013 earnings results and 2014 outlook subpar for such a highly valued stock. Of course, general market sentiment is also a big factor, as just about all the highly valued, high-growth (aka "momentum") stocks have experienced considerable pullbacks.

My purpose here isn't to delve into all the factors that have cost 3D Systems' stock about 50% of its value in 2014, but to highlight one factor I don't think many individual investors are aware of: operating cash flow. It's far from the only reason for 3D Systems' price fall, but I believe it is one of the reasons that professional investors have punished the stock more than many individual investors seem to believe is warranted.

The tale of two metrics
There's a huge disparity between 3D Systems' trailing-12-month (which is full-year 2013 here) operating income and its cash flow generated from operations.

DDD Operating Income (TTM) Chart

Source: YCharts.


Here's the same data, but on a quarterly basis, so you can see that the fourth-quarter 2013 was the primary reason for the annual disparity shown in the chart above:

DDD Operating Income (Quarterly) Chart

Source: YCharts.


Ideally, we'd like to see the reverse of what is shown in these charts. We'd like the cash flow generated from operations (which appears on a company's cash flow statement) to be greater than its reported operating income (which appears on the income statement). At the least, we'd like the two numbers to be in the same general ballpark.

This is because reported "earnings," or net income, and operating income are just accounting measures, while cash flow is the real McCoy when it comes to money. All sorts of legitimate developments can greatly affect a company's reported earnings and operating income. This isn't so with cash flow.

The reason I considered operating cash flow here instead of free cash flow is because 3D Systems, as is typical for high-growth companies, is investing a lot of cash in activities intended to fuel long-term growth. So we'd be handicapping such a company by looking at free cash flow (more specifically, by comparing FCF to net income). Operating cash flow, on the other hand, solely deals with the company's operating activities, since it doesn't include investing and financing efforts.

OK, so 3D Systems' cash generated from operations was considerably less than its reported operating income. Why does this matter?

Because investors who are solely considering net income and operating income, and ignoring cash generated from operations, are getting a rosier-than-accurate picture of how the company's core operation performed in the quarter. This is because the most commonly used valuation measures (such as price-to-earnings, or PE, ratio) and key metrics (such as operating profit margin and net profit margin) are based on a company's reported earnings and operating income.

Let's get to some specifics. 

 Year    Operating Income Cash Flow from Operations Operating  Margin Operating Margin (using cash flow)      
2013 $80.9 million $25.2 million 15.8% 4.9%
2012 $60.6 million $51.5 million 17.1% 14.6%

Source: 3D Systems' 2013 earnings report (link opens a PDF)


Investors only looking at reported net income and operating income after the company's last earnings report were aware that 3D Systems' 2013 operating margin decreased somewhat from 2012. They could easily calculate or read from news reports that the operating margin went from about 17% to nearly 16%. They wouldn't, however, know that the company's operating margin based on cash flow decreased much more than that, cut into a third.

It's important to remember that the fourth quarter of 2013 dragged down the company's cash flow from operations for the entire year. Long-term investors know that one quarter is just one quarter, and cash flow will vary for numerous good reasons, so not too much emphasis should be placed on just a single three-month period. That said, this divergence between operating income and cash generated from operations should be monitored going forward, as it could be cause for concern if it persists.

More specifically, investors should hone in on the following items in 3D Systems' cash flow statement as they accounted for a good chunk of this divergence: accounts receivable and inventory.

3D Systems' CFO provided good explanations during the conference call for why the company didn't collect the cash it was owed from creditors in the fourth quarter at the same rate it previously had (accounts receivable), and for the inventory buildup beyond that in line with revenue growth (inventory). Timing of sales and a changing business model, which involves more product being sold through resellers, were reasons cited for the outsized increase in receivables. Primary reasons cited for the considerable inventory buildup included that a couple of the product lines didn't sell as well as the company had projected (such as the consumer products), and the company introduced a slew of new products between EuroMold and the Consumer Electronics Show, so it was beefing up production.

The Foolish takeaway
I want to be clear that at this stage there is no reason to believe that anything has considerably affected 3D Systems' profitability prospects. This articles is talking about one quarter, and one quarter hardly makes a trend. Additionally, there seemed to be good reasons for the cash flow situation in the fourth quarter.

That said, cash flow from operations is a metric that investors should monitor going forward. 

3 stocks poised to benefit from 3 megatrends
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.


Read/Post Comments (10) | Recommend This Article (20)

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 April 15, 2014, at 8:33 PM, brandonchen wrote:

    DDD is a bubble stock on any accounting or valuation metrics..

  • Report this Comment On April 16, 2014, at 8:59 AM, albertjim10 wrote:

    DDD is a very good stock, what i believe is that there is a lot of people shorting the stock.

  • Report this Comment On April 16, 2014, at 9:44 AM, TMFMcKenna wrote:

    @Brandon,

    To use a take on a well-known Bill Clinton line, a lot depends on how one defines a bubble stock. Writing off all stocks that have high valuations as akin to the loser dot-com stocks of the late 90s, most to all of which were hugely in the red, is a mistake, IMO. Many winning stocks were considered "overvalued" before and during their big price run-ups.

    Beth McKenna

  • Report this Comment On April 16, 2014, at 10:40 PM, brandonchen wrote:

    @TMFMcKenna,

    Most "winning stocks" run up because too much expectation are built into the stocks.. If "winning stocks" don't deliver earnings, they will likely crush..

    Like what we saw on DDD's 50% crush YTD, no?

  • Report this Comment On April 16, 2014, at 11:24 PM, Risky88 wrote:

    bubble: Companies stock price is overly inflated, when the company itself has no chance at ever making money. Warren Buffett him self.

    3D printing is not a bubble, its a boom!

    Nothing goes up in a straight line.

  • Report this Comment On April 16, 2014, at 11:35 PM, TMFMcKenna wrote:

    Brandon,

    I agree that stocks that run up big time in value will often get crushed if they don't deliver on expectatons. I also agree that too high of expectations are often the cause of the run-ups.

    That said, a lot depends upon one's time frame for investing. Just because ANY such stock (DDD or otherwise) drops 50% in value in three months does not mean if won't go on to make higher highs. If DDD remains a successful co. in the 3-D printing space, in three or five years from now a 50% dip could look like a mere tiny blip on the stock chart. There's no guarantee either way.

    Beth McKenna

  • Report this Comment On April 17, 2014, at 1:59 AM, Kuwago wrote:

    Beth said, "More specifically, investors should hone in on the following items in 3D Systems' cash flow ,,,". Perhaps it would be better for investors to HOME in.

  • Report this Comment On April 17, 2014, at 2:44 AM, brandonchen wrote:

    Beth

    "a 50% dip could look like a mere tiny blip on the stock chart" is really dependent on your view of the 3D industry five years down the road isn't it? If the overall 3D industry would grow as strong as expected..

    A 100x PE valuation is difficult to justify the risk taken on for the reward five years later..

  • Report this Comment On April 18, 2014, at 2:44 PM, TMFMcKenna wrote:

    Kuwago,

    Sorry, no prize, as there are actually two typos, not just one.

    Risky88,

    Great quote -- thanks! I agree that 3D printing, as a whole, is a boom. That said, one still has to be careful, as that doesn't mean all the 3DP stocks will do well. But, a rising tide sure does tend to lift most boats.

    Brandon,

    The bottom line is that these type of stocks are not for everyone, and people who need their money within five yrs. probably shouldn't be in the stock market anyway. We're in a circular discussion, so we'll have to agree to disagree, and I'll wish you luck.

  • Report this Comment On April 18, 2014, at 5:13 PM, 5drakes wrote:

    An opportunity to buy more.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2915821, ~/Articles/ArticleHandler.aspx, 9/23/2014 4:52:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement