3D Systems Corporation Announces a Secondary Stock Offering: What Are the Implications?

3D Systems (NYSE: DDD  ) announced after the market closed on Tuesday that it is offering 5.95 million shares of its stock in a public offering. Additionally, the company granted offering underwriter Canaccord Genuity an option to purchase up to 892,500 additional shares of stock within 30 days. The largest 3-D printing company by market cap intends to use the proceeds from the offering to finance future acquisitions, for working capital, and for general corporate purposes.

Short-term pain
Right on cue, 3D Systems' stock price fell 5.7% to $53.40 in after-hours trading, which was to be expected. This is because a secondary offering of new shares dilutes existing shareholders' ownership percentage of a company due to the increase in the total number of shares outstanding. There is a corresponding dilution of each shareholder's stake in the company's profits, as expressed by earnings per share, or EPS. 3D Systems currently has 103.51 million shares outstanding, so this secondary offering dilutes current shareholders' ownership by 5.7%. Generally, the price of a stock falls approximately the same percentage as the dilution amount immediately after a secondary offering is announced.

3D Systems' stock has lost 42% of its value in 2014. So this secondary's timing leaves a lot to be desired. However, it's important for long-term investors to keep in mind that the stock is still in the green 16.2% over the one-year period.

3-D printed metal object. Source: 3D Systems.


Long-term gain or more pain?
Only time will tell if investors will consider this secondary to be a worthwhile endeavor. If 3D Systems uses the cash to fuel growth that increases the value of its shares over the long term, the dilution will have been worth it. 

At the stock's current trading price, this offering would bring in about $327 million. Of course, the secondary will almost surely be priced slightly lower than the stock's current trading price. Additionally, the underwriter gets a nice cut of the proceeds. Nonetheless, 3D Systems should net in the high $200 million range. The company had $306.7 million on its balance sheet at the end of the first quarter. However, it has announced acquisitions since then -- most notably, Medical Modeling and Robtec -- so it will surely use some of that balance sheet to close on buyouts over the next few months.   

How will the 3-D printing juggernaut spend its big bankroll? It's likely that one or more acquisitions are on the company's near-term docket. After all, 3D Systems is the Pac-Man in the 3-D printing space, gobbling up many smaller companies; the total is now at least 50 acquisitions in about three years. While growth-by-acquisition strategies can present some concerns, 3D Systems has apparently done a good job of incorporating these companies into its fold. Additionally, its organic growth has been quite solid. 

That said, there is recent cause for investors to pay more attention to 3D Systems' organic growth rate. While the company's organic growth was a solid 28% in the first quarter of 2014, this was down considerably from the previous quarter's 34%. Quarterly metrics will vary for all kinds of reasons, though, so it's best to compare metrics to averages. 3D System's organic growth averaged 29% in 2013, so the 1% dip in the first quarter isn't a concern. However, there could be cause for worry if the organic growth rate continues to slide on a sequential basis.

The company could likely use some of its proceeds to increase production capacity of its direct metal sintering printers. 3D Systems acquired metals capabilities last summer when it bought Phenix Systems. The company has sold out of its metal-printing systems in every quarter since then, as it has been production-capacity constrained. Expanding production capacity for items that are reportedly flying off the shelves would seem a good use of funds. 

Another likely use of funds is on activities related to Project Ara, a team-up with Google that is scheduled to ramp up in the first quarter of 2015. Ara's goal is to create a large-scale 3-D printing manufacturing platform to produce customizable, open-source, modular smartphones.

Foolish final thoughts
3D Systems' stock will naturally be under some pressure in the immediate term due to the secondary offering. That in and of itself is not cause for concern.

No doubt, some information will emerge soon regarding what the company intends to do with some of its proceeds. I'll provide my opinion on the company's plans -- and surely other Fools will, too -- when we learn more.

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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 May 28, 2014, at 1:44 PM, MonsterFluff wrote:

    time will tell goes without saying--- have to wait until Q4.3D only made $308K in cffo last Q and it was clear they wouldn't have enough cash to buy anything. Unfortunately cffo was low because AR and inventory are running amuck and if they don't follow through and sell all of that stockpiled mountain of consumer printers and start collecting from deadbeat accounts, buying more stuff isn't going to be all that helpful

  • Report this Comment On May 28, 2014, at 3:29 PM, TMFMcKenna wrote:

    @MonsterFluff,

    You won't get any arguments from me that investors need to watch DDD's cash flow from operations. I called this metric a "yellow flag" in my article after the company reported Q1 results (link: http://www.fool.com/investing/general/2014/04/30/a-deeper-di.... Additionally, I wrote a previous article about the same concern re: Q4 2013 results. The link to the first article is in the more recent article.

    That said, even if the company's CFFO was roughly equal to reported operating income in Q1, DDD would have still almost surely needed to do this secondary, given the amounts we're talking about.

    I'd agree we need to wait until about Q4 to see if things sort themselves out on this front. Given DDD did introduce a bunch of new products at the end of last year and early into this year (which reportedly accounted for the inventory build up), I expect the CCFO situation to continue through at least Q2. This is why I only called the situation a "yellow flag," not a red one. The explanations for the CCFO situation in Q1 were reasonable.

    As for the consumer 3-D printers, DDD naturally needs a presence in this market. However, I have written several times that the consumer space is not the place to focus -- barriers to entry are low, which means that margins are lower than in the industrial and commerical spaces. Additionally, those margins will likely be further squeezed as more companies enter this space. I'm hoping for investors that DDD does not concentrate too much of its energy and money on the consumer market.

    Beth McKenna

  • Report this Comment On May 28, 2014, at 3:53 PM, TMFMcKenna wrote:

    SECONDARY PRICING UPDATE

    At the time I wrote this article, 3D Systems had not yet priced its secondary. The company did release a statement today saying that it "has priced a public offering of 5,950,000 shares of its common stock for estimated total gross proceeds of approximately $317 million." That equates to a share price of about $53.28.

    This general pricing level was to be expected -- see my heading on "short-term pain." Things could get interesting on the pricing front, though, as the market punished the stock much more than the amount of the dilution -- DDD is down close to 12% and hovering around $50 per share as we near the market close.

    Beth McKenna

  • Report this Comment On May 28, 2014, at 4:02 PM, bostontrip wrote:

    I'm staying in for the ride, but not gonna buy more. Have my stop losses set. it does kinda explain why there was some insider (selling) not very long ago at all!

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