3D Systems: Focused on Growth

3-D is becoming a hot consumer technology and has helped to resurrect movie theaters over the past year. Major 3-D pictures, from Twentieth Century Fox's 'Avatar' to DreamWorks Animation's 'How To Train Your Dragon', have helped draw people to the theatre - and even enticed them to pay for premium tickets.

One public small cap company, 3D Systems TDSC, has worked for more than two decades behind the scenes to commercialize 3-D. Lately, 3-D Systems' stock has also become a hit with investors, and the company is poised for rapid growth for the next couple of years.

The 24-year-old South Carolina company's shares have been one of the best performing in the technology sector this year and in October the stock has been the second-strongest performer in the Russell 2000, posting a gain of 64.5 percent since September.

After the strong run up in shares the stock has taken a breather, falling back 13.2 percent after the company posted strong third-quarter results. It's time to determine if this drop in 3D Systems' share price is the start of a downward trend, or if it could be a buying opportunity.

***Unquestionably, three-dimensional technology is hot. Consumers love the 3-D viewing experience, and theater owners and filmmakers love the premium ticket prices.

For many manufacturers, the technology developed by 3D Systems is vital in getting their goods in front of the public eye. In addition to movies, 3-D modeling is used in everything from autos and airplanes to electronics and prosthetic limbs.

In addition to serving the consumer and electronics industries 3D Systems sells equipment and software to the automobile, medical, education and defense markets. Its technology does everything from laser sintering, a process that builds up 3-D models layer by layer, to 3-D printing and film-transfer imaging, to plastic and composite model building. The company also supplies the CAD software and consumables needed to make everything work for its clients.

All of these technologies help companies visualize how something will look in real life, not just on the computer screen. The technology not only helps bring movies to life, it also decreases the time it takes to bring cars and trucks to the showroom - and artificial limbs to patients.

***3-D Systems enjoys a diverse customer base with operations in the U.S. and six other countries in Europe and Asia. In 2009, the company estimated that 56 percent of its revenue came from outside of the U.S with sales coming from over 80 countries.

The 3-D modeling and development business is highly fragmented, but 3D Systems' growth strategy aims to change that. The company has made key acquisitions since July, including Illinois-based Express Pattern, leading Italian rapid prototyper Provel, and French prototypers CEP and Protometal. All of these acquisitions are helping to spur growth.

The company is also increasing its customer reach through a number of key alliances and distribution arrangements. Most recently, in October, the company agreed to distribute the software of German-based netfabb (spelled with a lowercase 'n').

***Despite 3D Systems' stock performance this year the company has had to battle through some tough years. In 2005 the company was profitable, earning $0.48 per diluted share, and the stock traded as high as $25. Then the company encountered three losing years when it lost a total of $2.38 per share. Shares plummeted, and reached a low near $5 per share in February of 2009.

The turnaround came later in 2009 when it earned $0.05 per diluted share thanks to cost-cutting measures. What's more, despite three acquisitions during the year the company increased its cash on hand. Now it has over $33 million in cash and hardly any debt.

The company appears to be back on track.

In the third quarter of 2010 revenue grew by 50 percent to $41.5 million year-over-year, net income grew 500 percent to $5.4 million from $900,000, and earnings per share increased 475 percent to $0.23 cents from $0.04 cents.

***One major positive change to 3D Systems' business model in 2009 was the introduction of its 3Dproparts service. Think of this service as the 3D manufacturing equivalent to FedEx Kinkos for flat printing.

3D Systems is establishing a network of parts printing service locations where customers can find a one-stop shop for the company's services, without having to invest in the hardware/software setups on their own.

The company has realized that not all potential customers want to invest in expensive equipment that might only see limited use. Now it's building a network of service centers to meet customers' rapid prototyping needs. This shift from a push sales strategy to a pull strategy (where customers are 'pulled' to the company's service centers) could become a major growth driver.

***Not many investors have discovered 3D Systems and shares are still thinly traded. Only around 80,000 shares are changing hands on any given day. But three analysts do cover the stock, and the consensus forecast is for earnings to continue to expand - by 1200 percent this year and by 46 percent next year. This earnings growth projection means the stock is trading with a fairly reasonable forward PE of 27-times 2011 earnings. However, the stocks PEG ratio is above 3, indicating that this stocks is trading at a sharp premium to its long term earnings growth.

I'd suggest keeping an eye on 3D Systems and waiting for shares to pull back before buying. I love the growth story, and I think the company's move to bring customers to its service centers could work well in a recovering economy.

But right now the rapid ascent in shares, coupled with the sharp pull-back, has me thinking this could be a volatile stock throughout the rest of the year. If you like the stock and want to get in on shares, use this volatility to your advantage and average into a position on big down days.

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