Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
It's earnings season, and you know what that means: Up and down Wall Street, analysts are crunching numbers and tweaking price targets on their favorite stocks. Today, 3D Systems (DDD 0.12%) caught the eye of folks at Piper Jaffray and Jefferies.
Here are three things you need to know about that.
1. 3D Systems reports
"Additive manufacturing" (also known as "three-dimensional printing") machine-maker 3D Systems reported its Q1 earnings numbers yesterday, and investors were not impressed. 3D Systems lost less money than it did in last year's Q1, but even so, the company's $0.09-per-share loss hardly qualifies as good news.
On the revenue front, 3D Systems reported sales of $156 million during the quarter. That was up only 3% year over year.
2. Wall Street reacts
Investors greeted the results with proverbial barrages of hurled vegetables, bidding 3D Systems shares down 6.7% in response to the company's news. On Wall Street, however, analysts are having a different reaction.
Piper Jaffray, for example, which has an underweight rating on 3D Systems stock, nonetheless played up the company's results as "less bad" than we've seen in recent quarters. According to TheFly.com, Piper Jaffray has also raised its price target on 3D stock by $0.50, to $11 a share.
Meanwhile, over at Jefferies & Co., analysts were also hiking their price target. Like Piper, Jefferies isn't entirely sold on 3D stock, assigning it only a hold rating. But as StreetInsider.com reports, Jefferies keyed in on a comment management made during 3D's post-earnings conference call, predicting "double digit" revenue growth in 2018. Jefferies now estimates pro forma profits rising as high as $0.70 per share. As a result, the firm raised its price target on 3D stock by 17%, to $17.50 per share.
3. Long-term goals, short-term achievements
And yet, leaving aside predictions of things that will happen 19 months in the future, in the nearer term, we're still sitting here looking at a stock that grew its revenue a bare 3% last quarter, and that is promising no more than 2% to 8% sales growth through the rest of fiscal 2017 -- so about 5% growth at the midpoint. That's a long way from "double digit" growth, and 3D is giving us little detail about how it plans to double its growth rate in a little less than two years.
On the other hand, there are a couple of reasons to be at least cautiously optimistic about 3D Systems' future. Let me lay those out for you.
The most important thing: Making money
First, profits. It's been two long years since 3D Systems last booked a full-year profit, but investors may not have to wait too much longer to see 3D get back in the black. Combining muted sales growth with cost-cutting that has already allowed it to grow profit margin (gross margin hit 51.3% in Q1), 3D Systems believes it can eke out at least a $0.02-per-share profit this year, and perhaps go as high as $0.06 -- and to be clear, these are honest-to-goodness GAAP profits 3D is talking about, not the watered down "adjusted" or "pro forma" profits the analysts seem obsessed with.
Second, cash. 3D Systems generated a good $13.8 million in positive free cash flow (FCF) in Q1 -- basically steady against Q1 results last year. Run-rate those cash profits out over the course of the year, and it's conceivable 3D Systems could generate in excess of $55 million worth of real free cash flow this year. If it succeeds, that will be about 38% more cash than the company generated last year, and three times more cash than 3D archrival Stratasys generated in 2016.
With 3D Systems now selling for a price-to-FCF ratio of about 32, relative to this full-year FCF projection, a growth rate of 38% would be sufficient to bring the stock into buy territory -- assuming 3D keeps up the pace. Granted, there's no assurance that it will grow that fast, or grow that fast for long enough to justify the still-high stock price.
But beggars can't be choosers. If you're looking for a reason to think 3D Systems might eventually be a stock worth buying, this reason may be the best you will get.