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Why Proto Labs Stock Just Dropped 9.5%

By Rich Smith - Oct 24, 2019 at 2:00PM

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A "soft" industrial environment takes a toll on sales growth -- and profits.

What happened

Shares of 3D-printed parts prototyper Proto Labs (PRLB -4.06%) are down 9.5% as of 2:45 p.m. EDT after the company reported its Q3 2019 financial results this morning.

Proto Labs earned $0.76 per share pro forma, beating analyst expectations for $0.74, but its sales were only $117.5 million, just short of the $119.4 million expected on Wall Street.

3D printer

Image source: Getty Images.

So what

Actual earnings as calculated according to generally accepted accounting principles (GAAP) were a bit worse than that, however. Net income for the quarter was $0.62 per share, down nearly 20% year over year. Sales, while up year over year, grew less than 2%.

CEO Vicki Holt noted that the "industrial environment" in which Proto Labs operates "has continued to soften throughout 2019," and gross margins declined by 120 basis points to 50.8%. On the plus side, GAAP operating profit margins grew 120 basis points to 18.1%.

Now what

Perhaps the best news, though, is that with sales up only 4% year-to-date, profits per share down 15%, and cash from operations down 1.5%, Proto Labs nonetheless managed to grow its free cash flow by controlling capital expenditures. Free cash flow for the first nine months of this year is now $37.6 million, a near-63% improvement over the $23.1 million in FCF that Proto Labs had generated by this time last year.

At this rate, Proto Labs is on track to generate perhaps $50 million in cash profit this year. The bad news is that with a $2.6 billion market cap, this still leaves the stock selling for 52 times free cash flow -- a valuation that's going to look pricey unless and until Proto Labs can get its business growing again.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Proto Labs. The Motley Fool has a disclosure policy.

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