3D Systems (DDD) Hit By High Operating Costs, Macro Woes

Earlier this month, 3D Systems Corporation (NYSE:DDD) reported second-quarter fiscal 2017 results with another huge earnings miss – its second after the last quarter’s staggering miss. The company continues to grapple with the headwinds that have marred its performance over one and a half years. We anticipate that rise in operating expenses, among other factors, will continue to thwart growth in the short run. In light of weaker-than-expected results, management trimmed the full-year 2017 guidance.

Mirroring these headwinds, the stock has had a dismal performance on the bourse. Over three months, 3D Systems has lost 44.5% in stark contrast to the industry’s average gain of 1.9%. Also, the Zacks Consensus Estimate for 2017 earnings has moved south over a couple of months, from 52 cents to 45 cents, on the back of five downward estimate revisions versus none higher.

Read on to find the major factors curbing the Zacks Rank #5 (Strong Sell) company’s growth and why it may be prudent to avoid the stock at the moment.

Factors at Play

Concurrent with the second-quarter 2017 earnings release, 3D Systemsreduced its guidance for 2017. 3D Systems now anticipates revenues in the range of $643–$671 million (earlier projection: $643–$684 million), reflecting year-over-year growth of 2-6%. Management also reduced the guidance for non-GAAP earnings to around 46 cents per share from the previous estimate of 51-55 cents.

Over the past few quarters, the company has been experiencing unfavourablebroader market conditions that have badly hit its financial performance. Macroeconomic factors such as economic slowdown, inflation, currency fluctuations, commodity prices and credit availability have negatively impacted the company’s performance.

Lower revenues from professional printers have been a pressing concern for the company in the recent past. In the last reported quarter, the company’s Printer revenues were down 14% to $28 million, while on-demand manufacturing decreased 5% to $26 million. The decline was primarily due to continued challenging market conditions that affected customers' capital investment cycles. Moreover, in the second quarter, gross margin contracted 30 basis points on a year-over-year basis to 50.6%.

Moreover, 3D Systems continues to incur high research & development (R&D) and acquisition costs. Going forward, the company believes investment in IT and go-to-market initiatives will result in higher expenses, thus restricting near-term operating income growth. During the second quarter, the company’s operating expenses flared up 4% to $87.5 million, as R&D expense rose 17% year over year, mainly on account of a rise in focused investments in production application solutions, metals and materials. Such costs will continue to take a toll on the company’s financial health in the near term.

The company operates in a highly competitive industry with its chief competitors being firms that manufacture or use machines to make models, prototypes and small-volume to medium-volume manufacturing parts. A few of its competitors may have substantially greater financial, marketing, manufacturing, distribution and other resources. Intensifying competition for experienced and qualified personnel in the industry also adds to the company’s challenges.

Stocks to Consider

Some better-ranked stocks are Lam Research Corporation (NASDAQ:LRCX) , Applied Materials, Inc. (NASDAQ:AMAT) and Arista Networks, Inc. (NYSE:ANET) , each carrying Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research has an average positive earnings surprise of 4.4% for the trailing four quarters, having surpassed estimates all through.

Applied Materials managed to beat estimates every time in the trailing four quarters, at an average earnings surprise of 2.7%.

Arista Networks has an average positive earnings surprise of 22.8% for the trailing four quarters, having surpassed estimates every time.

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