Q1 results were in line and Stratasys, Ltd. (NASDAQ:SSYS) reiterated CY17 guidance. Jefferies likes the progress SSYS has made in stabilizing the business. However, given the recent run up in the shares and uncertainty around the timing and magnitude of new manufacturing opportunities, the firm is moving to the sidelines for now.
Since mid-March Stratasys' EV / 2018 sales multiple has expanded from ~1.0x to ~1.7x (47x the firm’s CY18 EPS estimate) boosted in part by 3D Printing market recovery. The firm likes that SYSS continues to execute well in stabilizing the business, but it's hard to get confidence around the timing and magnitude of its key growth opportunity - manufacturing - given fuzzy management commentary. As such, the firm is keeping its prior CY'18 revenue estimate and is downgrading the company to Hold largely on valuation.
Q1 sales hit $163.2M, a bit above the Street's $162.7M. However, gross margin was only 51.2% (Consensus 53.9%). Product gross margin reached 57.9% vs. 59.3% in Q4 partly because Stratasys introduced a new line of prototyping printers that consolidates multiple prior SKUs in a cheaper and more capable format. Services gross margin dropped to 35% from 38.9% Q/Q as the company focuses on developing deeper engagements. The firm likes both tactics as a means to stabilize and grow the core business. EPS hit $0.05, in line with Consensus, helped by opex of $79.5M vs. the Street's $82.2M.
Stratasys reiterated its guidance from a quarter ago of ~$662.5M revenue (Street = $669.4M) and EPS of ~$0.28 (Street = $0.30). However, the firm found the tone of the call more cautious regarding new ventures.
As usual, the company talked about many new projects. Stratasys biggest opportunities appear to be in the MRO (maintenance, repair, and overhaul) market for aircraft / public transportation. The firm estimates the TAM for the third-party component segment of aircraft MRO to be ~$4B. In its long view upside case, the firm thinks Stratasys' CY'18 revenue could reach $800M and a corresponding $43 price/share partly driven by large manufacturing contract wins.
Stratasys currently trades at 1.7x the firm’s 2018 EV/Sales estimate vs. the peer average of 3.1x. Its $30 target (was $24) is 1.9x 2018E EV/Sales, below the peer average given perhaps lower near-term growth prospects. Risks: Execution risk; New entrants/increasing competition; Waning investor confidence or patience in industry growth prospects.