Long-time Revolution Investing subscribers know that my ranch was hard hit last summer by the Little Bear fire that raged through central New Mexico in June. I was incredibly fortunate that my home, loved-ones and animals were unhurt, but it was nonetheless very traumatic.
Today, I started smelling smoke again, after reading a lengthy, detailed expose on why 3D Systems’ fantastic growth may not be so fantastic after all. That in fact, there may not even be real growth in DDD’s core business once adjustments are made for a multitude of acquisitions made over the past few years. And despite the stock’s tumble on that news today, we’re still up about 25% from our purchase price of around $34 per share. I don’t play with real fire and I certainly don’t mess around with questionable accounting, because it burns too. Today I’m selling DDD.
There was a very well-written article published on Seeking Alpha today http://
seekingalpha.com/article/ 999501-3d-systems-has-the- printer-jammed?source=yahoo by an independent trader named Douglas House that built upon a few points made last month by Gray Wolf Research http://seekingalpha. com/article/943201-3d-systems- at-the-peak-of-inflated- expectations. Great investors and traders have to be willing to change their stance when analysis dictates doing so, and that’s the case right here with DDD. Housee took the Gray Wolf report and dug in with much more detailed forensics and I don’t like what he’s dug up.
Wolf gets the main point right — to question the sustainability of DDD’s high growth, in terms of both revenue and earnings. And without the expectation of very high growth over the next several years, there’s simply no way to justify DDD’s current valuation. Essentially, DDD is being rather opaque at best in the information in its financial statements, which doesn’t allow for an apples-to-apples comparison of revenue trends year-over-year. When House attempted to back into the comparable stats for each period, with and without the acquired companies, the math didn’t add up. This is very concerning.
Perhaps more disconcerting to me, House points out that most of the 24 acquisitions made since 2009 included a stock component. From the financial statements: “These shares were issued in a private transaction exempt from registration under the Securities Act of 1933.” Over the same period, company executives exercised options, raising cash for the company–House implies that management exercised its options and then used them in private transactions with the selling parties in its acquisitions. This isn’t something we can verify via public financial statements, but the implication is disconcerting.
DDD had about $3 per share of cash on the balance sheet as of September 29, but that falls to $1 net cash per share when debt is factored in. That implies an enterprise value of more than $2.3 billion, or about 5.4x projected 2013 revenue. On an earnings basis, the multiple is a lofty 26.3x. I still like the long-term thesis for 3D printing but I’m going to have to find a vehicle with which I’m more comfortable with management and financials. Because if even some of the accusations / concerns noted above are valid then I don’t want to be holding the shares when the whole story comes to light. Investing and trading and finding truly revolutionary companies is hard enough and I am not going to sit around and risk my hard-earned capital and/or reputation on a company where I no longer feel comfortable with the financials. At more than $42 per share we’ve made a solid gain in just a few months. A red flag has been thrown and DDD is being thrown out of our game. I’ll be selling all my DDD common and calls tomorrow.