I have recently written about Proto Labs for SeekingAlpha. Making a long story short, I see Proto Labs (PRLB) as a cloud manufacturing company. It has a huge amount of manufacturing capacity concentrated in its locations, and it uses a digital thread to allow customers to manage the production process. That allows small companies, without enough production resources, to bring small batches quickly to market.
There have been some operating issues, namely, Rapid’s acquisition and changing the CNC production facilities. The integration of Rapid brought unanticipated problems related to the digital thread that Proto Labs uses in its processes. The company had to develop and adapt the systems and processes to accommodate Rapid’s offerings, and that’s still an ongoing challenge. On the other hand, moving production facilities is never a smooth process, and in Proto Labs’ case, it impacted the gross margin. Because the company had anticipated a much smaller impact, the market reacted badly.
In my opinion, these are short term woes. Which compare with 3D Systems (DDD) that seems to have a long-term problem. The 3D printing company is still struggling to define two or three market segments and to develop a good business model to explore them.
A quick look at both companies’ ratios gives us a perfect view of the differences between both companies:
Table 1 – Comparison between Proto Labs and 3D Systems
The margins figures reflect the difference between the two companies. Proto Labs has a much better business model, and its profitability reflects it. Looking at the past sales and earnings, we can see that 3D Systems has declined, struggling to define its target markets and to differentiate itself from competitors. Obviously, Proto Labs carries a high Price-to-Sales ratio and Price-to-Book ratio. However, you’ll be paying a high multiple for profits, which in my book is still better than paying a low multiple for losses.
The enormous drop in 3D Systems stock price, following the 19Q1 earnings report, proved contagious for the rest of the competitors.
(Source: Seeking Alpha)
As we’ve seen, the stark difference between both companies operationally means that Proto Labs is now a lot cheaper than before. It is not a steal at the current price, but it is near its 52-week lows. Proto Labs is clearly one of the most solid companies in the low volume manufacturing. The current drop in price might be a good time to start a position.