Why Investors Punished 3D Systems Today Despite Its Earnings Beat

3D Systems reported better than expected results for its fiscal first quarter today, but the stock took a hit anyway. Here's what investors need to know from the earnings call.

Apr 29, 2014 at 4:16PM

3D Systems (NYSE:DDD) reported fiscal 2014 first-quarter earnings that topped analyst estimates before the market opened on Tuesday. However, it wasn't enough to stop investors from pushing the stock lower by more than 10% to around $44.15 in early trading. Let's look at what 3D Systems' earnings announcement told us about the health of the business today, and whether investors should be worried.

Profits take a hit
3D Systems delivered strong revenue growth in its first quarter, up 45% to $147.8 million from the year-ago period. That beat Wall Street estimates for revenue of just $145.5 million in the period. However, it wasn't enough to offset the market's disappointment over 3D Systems declining profitability in the quarter. While the company's non-GAAP earnings of $0.15 per share were inline with estimates, GAAP net income of $4.9 million in the first-quarter marked a 17% decline from the same period a year ago.

Organic growth should be another area of concern for long-term investors in this name. Organic growth declined to 28% in the first quarter, down from 34% in the prior quarter. Investors should keep watch of this in the quarters to come, as this together with declining profitability could spell disaster for 3D Systems down the road. 3D Systems has used the bulk of its cash to fund a spree of acquisitions recently, which makes organic growth that much more important for the company today.

Screen Shot

Source: 3D Systems

3D Systems stock currently trades around $45 a share after today's sell off. However, the stock still doesn't look cheap with a price-to-earnings growth or PEG ratio of 4.8 -- one of the highest in the industry. It also trades at 111 times earnings today, which is one of the highest P/E ratios among its peers. This tells us that the market has priced high expectations into this stock.

Moreover, earnings could remain pinched in the future, as 3D Systems plans to continue spending loads of cash on acquisitions and research and development. In its earnings release today 3D Systems president and chief executive Avi Reichental said, "While our stepped up strategy and investments continue to pressure our quarterly earnings, we believe that our actions set the stage to substantially compress the time required to deliver greater value. Accordingly, we expect operating leverage to resume in the second half of 2015 and be fully restored the following year."

But if 3D Systems stock hopes to recover to its 52-week high of around $97 a share, investors will need the company's investments to begin paying off long before the second half of 2015 or early 2016. After all, 3D Systems delivered better than expected results for its fiscal-first-quarter today, but it still wasn't enough once the market factored in slowing growth and declining profits.

Looking ahead, 3D Systems expects full-year revenue in the range of $680 million-$720 million and GAAP earnings of $0.44-$0.56 per share. Management was also quick to point out that it expects "a greater portion of revenue and earnings to be generated during the second half of 2014," as new products and services start to pay off. Nevertheless, investors may want to be cautious going into this name until we see a meaningful improvement in profitability and organic growth.

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends 3D Systems. The Motley Fool owns shares of 3D Systems. 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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