PRLB - Proto Labs: The Rally Appears Overdone

2023-07-14 11:32:57 ET

Summary

• We put Proto Labs, Inc. in the spotlight for the first time since early in 2022.
• The stock has managed a gain of some 40% so far in 2023 despite tepid sales growth projected for this year.
• Is the rally sustainable?  An investment analysis around Proto Labs stock follows in the paragraphs below.

There is only one thing that makes a dream impossible to achieve: the fear of failure .”? Paulo Coelho.

Today, we take our first look at Proto Labs, Inc. ( PRLB ) in quite some time as this 3D printing focused manufacturer goes back into the spotlight. The company's stock has advanced some 40% in 2023 year-to-date. Can the rally continue, or is some profit taking overdue? An analysis follows below.

Company Overview:

Proto Labs, Inc. is located just outside of Minneapolis, MN. The company operates as an e-commerce digital manufacturer of custom prototypes and on-demand production. These products include but are not limited to: injection molding; and computer numerical control machining as well as three-dimensional (3D) printing which includes stereolithography, selective laser sintering, direct metal laser sintering, multi jet fusion, etc. as well as sheet metal fabrication products. The stock trades just above $35.00 a share and sports an approximate market capitalization of $925 million.

The company's two biggest business lines are Injection Molding and CNC Machining. Both of which it is focused on growing as they have higher margins than other products the company offers.

First Quarter Results:

On May 5th, Proto Labs, Inc. posted its first quarter numbers . The company printed a non-GAAP profit of 30 cents a share, more than a nickel a share above the consensus. However, sales increased just 1.4% from the same period a year ago to $125.9 million, which was some $7 million above low expectations. Revenue among the company's different business lines broke down in the following way:

3D printing had the best growth, as revenues were up just over 11% over the same period a year ago. Sheet Metal was the poorest performing part of the company, as sales declined nine percent on a year-over-year basis. Adjusted EBITDA for the quarter came in at $14.1 million representing 11.2% of overall revenue. This compares to $17.8 million in adjusted EBITDA and 14.3% of sales in 1Q2022.

Analyst Commentary & Balance Sheet:

Since first quarter results came out, both Lake Street ($41 price target) and Benchmark Co. ($45 price target) have reissued Buy ratings on the stock. A few days before quarterly results were posted, Craig-Hallum maintained a Sell rating on the shares. No price target was attached to the rating.

Just over three percent of the outstanding float in this stock is currently held short. There has been no insider activity (either buying or selling) in the shares since late in 2021. The company ended the first quarter of this year with just under $105 million of cash and marketable securities on its balance sheet . The company repurchased some $21.1 million worth of its own stock in the first quarter.

Verdict:

The company made $1.50 a share of profit on just over $488 million of sales in FY2022. The current analyst firm consensus is that Proto Labs will have a profit of a $1.19 a share in FY2023 as sales barely inch up to nearly $495 million. They see sales growth accelerating to four percent in FY2024, with the company making $1.28 a share in earnings.

The company is targeting a huge potential market and seems to have some strengths over its competitors.

That said, it is hard to get too excited about the stock based on valuation after the shares approximate 40% rise in 2023. Proto Labs, Inc. stock trades at just under 30 times forward earnings. In addition, earnings are projected to fall some 20% this fiscal year while revenues are expected to be up less than $10 million from last year. The company also faces significant macro challenges as do most manufacturers in the current economic environment. Management furloughed a quarter of its workforce from its poorly performing sheet metal business in the second quarter.

Given that if I owned the stock, I would be taking profits after a big run up in the first half of this year. Sales seem to have plateaued over the past half decade, and I would like to see meaningful sales growth before I revisit the investment case around Proto Labs. The first time we visited Proto Labs, when the shares were trading in the mid-$50s in early 2022, we came to the same conclusion.

Hope is a waking dream .”? Aristotle.

For further details see: