What happened

Shares of 3D-printed parts prototyper Proto Labs (PRLB -1.28%) 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.