Can 3D Systems (DDD) Strategies Aid A Turnaround In 2018?

The year 2017 has not been a smooth ride for 3D Systems Corporation (NYSE:DDD) . The leading provider of 3-D modeling, rapid prototyping and manufacturing solutions has seen its shares fall 32.1% year to date, underperforming the Computer - Mini computers industry’s growth of around 46.3%.

The underperformance, in part, is due to surging costs as well as macroeconomic woes that have sparked concerns among investors. Moreover, in light of the company’s dismal third-quarter 2017 results and uncertain operating environment, management withdrew full-year 2017 guidance.

Further, the Zacks Consensus Estimate for 2017 earnings has moved south over a couple of months from 44 cents to a loss of 4 cents. This indicates extremely bearish sentiments for this Zacks Rank #5 (Strong Sell) stock, reflected by five downward estimate revisions versus none upward. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

What Ails the Company?

Despite significant investments and implementation of organizational changes to improve execution, 3D Systems is struggling to retain its leadership position in 3D printing market. Going forward, the company’s investment in IT and go-to-market initiatives are likely to result in higher expenses, restricting near-term operating income growth. The need to continually spend heavily on research and development to keep up with the competitive marketplace is adding to margin woes on a sustained basis.

Moreover, macroeconomic factors such as economic slowdown, inflation, currency fluctuations, commodity prices and dearth of credit availability remain concerns for the company. In third-quarter 2017, revenues from 3D printing products and services were significantly undermined due to continued challenging market conditions that adversely impacted customers' capital investment cycles and reduced demand across most geographies. Further, its performance in Americas and Asia Pacific was very weak. In absence of inorganic growth in the past year, its performance has suffered to an even greater extent. If these problems persist, the company’s earnings will likely continue to be pressured, going forward.

Moreover, the company had commenced significant transformational work in solving legacy issues in the third quarter, which partly led to the withdrawal of guidance for 2017. The company cited that it is unable to predict earnings and sales numbers accurately. This action has unnerved investors badly, as it indicates a highly uncertain environment.

Light at the End of the Tunnel?

We expect margin contraction and higher operating expenses in the upcoming quarters as the company focuses on strengthening partnerships and enhancing productivity. As a matter of fact, we believe that the company’s significant investments to counter the aforesaid challenges will take some more time to deliver credible top-line growth.

The company has also undertaken a number of strategic initiatives for improvement of existing 3D printers and boosting productivity to capitalize on growth opportunity in the industry. However, all the efforts are at a nascent stage and are expected to take time to contribute to top-line growth meaningfully.

Although the company’s turnaround efforts are likely to yield results in the long run, its impact on near-term results is expected to remain muted.

Stocks to Consider

Some better-ranked stocks in the same space are Axcelis Technologies, Inc. (NASDAQ:ACLS) , AMTEK, Inc. (NYSE:AME) and Avid Technology, Inc. (NASDAQ:AVID) . While Axcelis Technologies sports a Zacks Rank #1 (Strong Buy), AMTEK and Avid Technology carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Axcelis Technologies has surpassed estimates thrice in the trailing four quarters, with an average positive earnings surprise of 25.2%.

AMTEK has outpaced estimates thrice in the preceding four quarters, with an average earnings surprise of 4.1%.

Avid Technology has outpaced estimates twice in the preceding four quarters, with an average earnings surprise of 18.3%.

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