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

While secondaries are bad news for investors in the immediate term, they can be good or bad news in the long term.

May 28, 2014 at 1:33PM

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.

Ddd Metal Printing

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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Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Google (C shares). The Motley Fool owns shares of 3D Systems and Google (C shares). 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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