At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Speaking of the best...
Investors in 3-D printing star 3D Systems Corporation (DDD 1.07%) are wearing sackcloth and gnashing teeth today, traumatized by the fact that Merrill Lynch just downgraded the company's stock to underperform from buy. But should they be?
According to Merrill, 2014 is the year that organic growth will peak at 3D Systems Corp. While it's possible the company will continue to grow revenue in the years to come, investors are likely to see profit margin collapse as the company plays "catch-up" -- investing in niches where rivals ExOne (XONE +0.00%), Stratasys (SSYS +0.63%), and voxeljet (VJET +0.00%) have an edge.
More dangerous still, Merrill worries that 3D Systems will be tempted to "buy growth" -- spending money on acquisitions that will keep its revenue rising, but with little profit dropping to the bottom line. The Merrill analyst warned that if 3D Systems overpays for its acquisitions, or encounters difficulties integrating its new prizes into its own business, the revenue growth the company enjoys could come at the cost of dwindling profit.
To Merrill, this all adds up to a strong case for selling the stock, and taking what profit remains after 3D's stellar 2013 performance and this year's 20% decline. But is Merrill right?
Let's go to the tape
Yes. Merrill Lynch may very well may be right.
Here at Motley Fool CAPS, we've been tracking the performance of this banker's stock picks for close to eight straight years now. We've discovered that over the course of more than 950 buy and sell calls, Merrill has racked up a record of outstanding performance relative to its peers. On average, nearly 54% of its recommendations turn out right. (A 54% accuracy rating is harder than it looks. It's good enough to outperform about 95% of the investors on the planet.)
Merrill has also outperformed the S&P 500 by a good 21 percentage points per pick over the last eight years. A few examples:
|
|
Merrill Lynch Says: |
CAPS Says: |
Merrill Lynch's Picks Beating (Lagging) S&P By: |
|---|---|---|---|
|
3D Systems |
Outperform |
*** |
32 points |
|
Stratasys |
Outperform |
**** |
13 points |
|
Hewlett-Packard |
Outperform |
** |
(64 points) |
Prior to making today's underperform call, Merrill Lynch soundly outperformed the market with its prior endorsement of 3D Systems. It's beaten the market with 3-D printing rival Stratasys as well -- underperforming only when it comes to a company tangentially related to the 3-D printing sector, former Stratasys partner Hewlett-Packard.
In short, if you're going to take advice from any professional banker on whether to buy or sell 3D Systems, Merrill Lynch is probably a good place to start.
One final thought
This is doubly true in the case of 3D Systems, where the stock's valuation is so distressingly high already. Priced at an astounding 172 times trailing earnings, and a nearly as expensive 166 times free cash flow, 3D Systems isn't just priced for perfection. It's priced beyond perfection.
Even if everything goes right for this stock, even if 3D Systems succeeds in growing earnings at the nearly 20% annual rate of growth that Wall Street projects, there's just no way a stock with a double-digit-growth rate deserves a triple-digit P/E.
3D Systems is overpriced, and I believe Merrill Lynch is right that it will underperform the market.
