3-d printing stocks poised for recovery

Few megatrends are potentially more transformative than 3-D printing. The prospect of manufacturers printing products and parts will shake industry to its core.

Although plastics-based 3-D printing has had most attention, it is the metals-based equivalent that could reshape global supply chains and industries.

Management consultancy McKinsey says 3-D printing is faster than traditional metal production, capable of being cost-effective in small batches, has less waste, and offers far greater design freedom and flexibility for manufacturers.

Conventional industrial manufacturing relies on large-scale production and multiple suppliers. An industry of car-parts suppliers, for example, provides components to auto manufacturers that assemble vehicles in giant production plants. The same is true in aviation.

Those plants are costly to build and maintain, have rigid production requirements and rely on volume. Compared to 3-D printing, they look archaic. In time, 3-D printing will enable just-in-time, small-scale customised production that is closer to consumer markets.

In theory, a car maker could print parts as needed, better customise cars in response to consumer demand and bypass parts of its supply chain. Far less capital would be needed to establish a 3-D printing site compared to building a traditional car plant. It is a revolutionary change – for companies and consumers – by any measure.

The reality is 3-D printing, for now, is a tiny part of the global metals production industry. McKinsey estimates the market for 3-D metals printing will be worth up to US$10 billion by 2035, small in the scheme of global technology megatrends.

It is likely that the next five years will be characterised by low-scale experiments, as global manufacturers see what is possible in 3-D printing and metals additives.

Wider industrial adoption will follow as 3-D printing techniques are used in more manufacturing processes. Industrial demand for 3-D printing looks far more reliable than consumer demand for the technology.

For investors, that means a long wait before 3-D printing technology is adopted and turns into the huge revenue and profit growth that can justify valuations of 3-D printing stocks.

Production limitations

The technology still has many challenges: large-scale 3-D printing and metal additives are costly; and there are limitations on how many materials can be mixed and the dimensions of printed parts produced by 3-D printers.

Another problem is lack of choice in 3-D printing stocks. ASX has a handful of 3-D printing technology companies and most are too small and speculative for portfolio investors. Some larger ASX-listed software companies are also exposed to 3-D printing.

Hype is another risk. The 3-D printing boom first captured the market’s attention about five years ago, driving share prices of global companies in the sector to silly levels. 3-D printing stocks were all the rage in US equity markets about five years ago.

As often happens, investors got ahead of themselves and 3-D companies disappointed. Talk of mass consumer adoption of 3-D printing was just that – talk. Share prices of several stocks in the sector collapsed, others have drifted lower for five years.

Hype has been replaced by media gloom this year about 3-D printing companies failing to live up to expectations. Market talk of a near-term turnaround in 3-D printing stocks is absent, and most analysts have “hold” or “reduce” recommendations. That could be a buying signal.

Predictably, the market has cooled on global 3-D printing stocks just as the trend is getting interesting. A recurring pattern of megatrends is too much enthusiasm and speculation as the start, heavy losses, then overlooking the trend as it gains substance. The smart money buys back in as speculators, burnt by the hype, vow to avoid the sector forever.

Some big deals in the past few months between US defence companies and 3-D printing suppliers suggest the military sector could be an early adopter of the technology.

The US Army, for example, is testing 3-D printing to make robots. Defence contractors are using 3-D printing to produce complicated parts for navy ships. Other firms are examining whether 3-D printers can make body armour, prosthetic limbs and ballistic missiles.

Global 3-D printing stocks

The best way to play the trend is to look overseas for global 3-D printing leaders that are well established and growing their revenue.

Stratasys was a go-to 3-D printing stock in its heyday earlier this decade. Established for three decades, the Nasdaq-listed company is a leading provider of 3-D printing technology and additive manufacturing. Customers use its entry-level 3-D printers for rapid prototyping for digital manufacturing.

Stratasys has fallen from a 52-week high of US$28.88 to US$18.95. Recent news that its CEO resigned and lower-than-expected profit because of weaker demand in the government, automotive and aerospace sectors, has weighed on the stock.

Chart 1: Stratasys (SSYS:NAS)

Source: nabtrade

The price fall has driven Stratasys closer to value territory. An average price target of US$19.11, based on the consensus of nine broking firms, suggests Stratasys is fully valued at the current price. Capitalised at US$1 billion, Stratasys is one to watch if the price keeps falling.

Chartists will wait for Stratasys to break out of a long period of sideways share-price consolidation and trend higher.

Market leader 3D Systems Corporation is another option. Listed on the New York Stock Exchange, 3D Systems is capitalised at US$1.4 billion. Like Stratasys, 3D Systems is well down on its 52-week high. The stock, now US$12, peaked above US$90 in 2013.

Chart 2: 3D Systems Corporation (DDD:NYS)

Source: nabtrade

3D Systems announced a deal with Huntington Ingalls Industries in May to produce “high accuracy parts” for the US Navy. 3D Systems looks well placed to win other defence sector work, which, as mentioned, is an emerging source of demand for the technology.

The market believes 3D Systems is still overvalued. An average price target of about US$10, based on the consensus of eight broking firms, compares to the current US$12 share price. Analysts are still, on average, downgrading their recommendations for 3D Systems. The worst might nearly be over. Analysts expect 3D Systems to post a final loss in 2019 before turning a small profit in 2020. A few large defence sector contracts would condense that timeline and be a re-rating catalyst.

3D Systems has low debt and looks well placed to benefit from rising demand for industrial 3-D printers and additive manufacturing processes in the next few years.

Australian 3-D printing stocks

Emerging 3-D printing play, Titomic, stands out. The stock soared in May on news it launched the world’s largest and fastest metal 3-D printer at its Melbourne facility.

Titomic has raced from a 52-week low of 37 cents to $2.74, making it one of the market’s hottest micro-caps.

Chart 3: Titomic (TTT:ASX)

Source: nabtrade

Titomic’s industrial-scale 3-D printer, co-developed with CSIRO, could help automotive, aviation and other manufacturers to custom-print metal parts from their own manufacturing facility, without relying on suppliers Titomic’s additive-manufacturing processes are thought to slash the price of titanium manufacturing, compared to sourcing titanium from Russia.

ASX queried Titomic in May over disclosure of a collaborative agreement with major golf products supplier, Callaway Golf Company. In its response, Titomic said revenue from the agreement will be “nominal”. But the market’s reaction to talk of a major US sports company using 3-D printing technology to develop golf clubs, reinforces the technology’s potential.

Titomic has strong technology and CSIRO has a solid record of defending its patents. But after almost tenfold gains from its share price low, Titomic is one for speculators only. Better to stand aside and wait for more steam to come out of Titomic shares.

Software star Altium is a better way for long-term investors to play the 3-D printing trend. The developer of electronic circuit board software is not a 3-D printing stock, but its software, used to design electronics for devices produced through 3-D printing, is leveraged to the trend.

Altium is eyeing a tiny slice of a US$2-trillion market for on-demand electronic design and manufacturing, produced via 3-D printing.

It is early days, but Altium could provide free software to retail product designers, such as university students, who design electronic circuit boards for product prototypes that are manufactured on-demand. Then receive a small fee from the product manufacturer – a fascinating business model if it works, given expected growth in 3-D printing and on-demand production for small-scale runs.

Altium is not cheap. The stock trades on a forward price-earnings (PE) multiple of about 50 times on some broker estimates. But the well-run Altium is justifying its valuation through faster-than-expected growth, reflected in its recent result that beat market expectations.

Chart 4: Altium (ALU:ASX)

Source: nabtrade