Why Stratasys, Ltd. Bought Solid Concepts for a Great Price

Last month, Stratasys (NASDAQ: SSYS  ) entered into a deal to buy the largest U.S. independent 3-D printing service provider, Solid Concepts, for $295 million. Stratasys' greater move into the 3-D printing as a service space allows the company to diversify its portfolio, stave off the threat of commoditization, and taps into a deep well of 3-D printing manufacturing expertise, especially in the burgeoning area of metal 3-D printing where the company lacks experience. In addition, Solid Concepts has six existing locations throughout the U.S. that Stratasys will be able to showcase its product portfolio and drum up new business. After taking into account current 3-D printing stock valuations, $295 million is a very reasonable price for Stratasys to pay for Solid Concepts.

The back story
In 2013, Solid Concepts generated approximately $65 million in revenue, and based on a $295 million selling price, Stratasys paid about 4.5 times Solid Concept's trailing-12-month revenues for a company that's been in business since 1991 and has built an incredible reputation in the field of 3-D printing manufacturing. Solid Concepts took the world by storm last November when it showcased its technical expertise by 3-D printing the world's first metal handgun. This technical expertise is sure to come in handy in the future, considering how 3-D printing manufacturing is expected to become an increasingly important segment of the overall 3-D printing industry, which is currently dominated by prototyping applications. General Electric has been working to 3-D print fuel nozzles on a larger scale for an upcoming jet engine that will take to the friendly skies in the coming years. In total, GE expects to 3-D print in excess of 40,000 fuel nozzles a year when production begins.

Speaking of metal 3-D printing, it experienced 75.8% unit growth in 2013 over 2012 levels. Although a large percentage of this growth can likely be attributed to the fact that GE purchased Morris Technologies and took an estimated 50% of metal 3-D printing capacity off the market, it is still an encouraging sign for the prospects of 3-D metal printing plays in the future of manufacturing across the industry. Stratasys investors should expect 3-D printing services around metal and manufacturing applications to become an increasingly important aspect of its business longer term.

Crunching the numbers
Stratasys bought Solid Concepts for 4.5 times its 2013 revenues at a time when its own stock was trading around 9.5 times trailing 12 month revenues and its peers were trading for even higher multiples. Relative to publicly traded 3-D printing stocks, Stratasys acquired Solid Concepts for a great price, especially after taking into account the expertise that comes along with the purchase in an industry that's experiencing constrained labor market conditions. Because Stratasys has the option to finance the deal with cash, stock, or a combination of the two, there's an opportunity for the company to leverage its richly valued stock as cheap currency to fund the deal. Management expects the deal will close in the third quarter and be accretive to adjusted earnings within 12 months of closing.

All in all, Stratasys investors should be pleased that management can make great strategic deals for a reasonable price in an industry that's very richly valued compared to the overall stock market.

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  • Report this Comment On May 30, 2014, at 5:04 AM, Interventizio wrote:

    So SSYS just entered the metal 3d printing niche? That's good news and what I was looking forward to.

  • Report this Comment On May 30, 2014, at 2:29 PM, TMFTopDown wrote:

    @Interventizio - Stratasys now offers metal 3-D printing capabilities through these service centers, but to be clear, it doesn't make the actual metal 3-D printers. Those are bought from third parties like EOS out of Germany.

    Thanks for your comment!

    Steve

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