What are your thoughts on PRLB following Q3 14?

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Hi all,

PRLB reported Q3 recently and the stock itself has taken a beating. I thought the quarter itself was okay, but the market didn’t like management’s forward guidance.

Management guided for $53M to $56M in revenues, resulting in non-GAAP EPS in the $0.40 to $0.44 range. If we take the mid-points, management is guiding Q4 2014 for:

  • Revenue of $54.5M. That would be about 24% QoQ revenue growth
  • Non-GAAP EPS of $0.43. That would be about 10% QoQ EPS growth
    Based on management’s EPS guidance, the forward non-GAAP EPS is $1.73. A stock price around $61 puts PRLB on a 35 forward PE.

The Table below provides a quarterly revenue, eps, gross margin summary etc. I find looking at this and the forward guidance useful.


======================================================================
    Revenue     Margin  GAAP EPS   Non-GAAP  Shares Out   Unique Devs
======================================================================
Q3 14   $54.6M   60.4%      $0.40   $0.44    26,200,741       8,680    
Q2 14   $52.9M   61.8%      $0.42   $0.45    26,146,848       8,222
Q1 14   $46.1M   62.9%      $0.39   $0.41    26,091,069       7,669  
Q4 13   $44.0M   62.7%      $0.36   $0.39    26,115,866       7,290
Q3 13   $42.0M   61.7%      $0.34   $0.37    26,002,240       7,308
Q2 13   $39.7M   62.7%      $0.33   $0.36    25,850,247       6,885
Q1 13   $37.3M   62.5%      $0.32   $0.35    25,645,744       6,488
Q4 12   $33.6M   62.5%      $0.29   $0.31    25,359,071       6,042
======================================================================

Now, the 35 forward PE can be thought of as cheap, but we don’t know if growth is actually slowing down. Management’s guidance for next quarter suggests slow down in the earnings and revenue growth. I did read the conference call transcripts and management did sound very very cautious about their growth next quarter, although they did reiterate their longer-term operating income growth rate of 25%. The tone (I didn’t hear it just read it) sounded cautious, and they said that their guidance will be conservative because of Europe and the state of European economy. Proto Labs builds prototypes and is definitely affected by economic cycles and slowdown in the economy.

Additionally, it could be growing pains. I mean growing from a $200 million revenue/annum base is much harder than growing from $50 million/annum revenue base, and they just got a new CEO and they will have a new CFO to help make the next transition. It could also be that the new CEO is setting the bar low to get a

So, if its growing pains then these prices look like great entry points. If not, and growth doesn’t come back to the 20 - 25% range, then I would think the PE multiple will shrink further.

I like the business though but don’t have that much in-depth knowledge as I only recently started following them. I have an average sized position, which I had started a week or so back.

Which way do you think the business is going to go? What are your thoughts on the quarter?

Anirban

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Hi Anirban,

I owned PRLB for a little over a year, from June 2012 to August 2013. I thought it was a great company: well managed, strong competitive advantage, and a long growth runway given the combination of organic growth in their customer base and expansion in capabilities and materials offered that would allow them to handle more sophisticated designs and enter new industries.

But, for some reason I’ll never understand, the stock was always swept up and down with the 3D-printing stocks (even though PRLB only does traditional manufacturing: CNC machining, injection molding, etc, and does not offer 3D-printing). The stock rocketed up to what I thought were just silly prices, and then the CEO retired to go do charity work. I decided that I wasn’t comfortable holding on during the transition with so much future value built in to the stock price, so I sold.

I haven’t really followed the company since then. It’s trading lower now than it was back in August 2013, but a forward P/E of 35 still seems expensive to me. But assuming I was happy with the new management after getting back up to speed, I would definitely be interested again at the right price. I think they are in a very attractive business with a strong moat.

Neil

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Thanks Neil. Appreciate your comments.

Yes, it is indeed strange that Proto Labs gets bundled with 3D printing stocks. This fits more under the industrial basket than under technology. Also, FYI, they have recently launched a prototyping line that’s using 3D printing technology.

Anyways, I think I will stick with my position and try to learn more about the business. The strong moat was the attractor. They have really no well-defined competition and they are attacking a fragmented market. I 'm going to watch this closely for a few quarters to determine how the new management is performing.

Anirban

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