Proto Labs Stock Soars 192% From IPO On Growth
Proto Labs ( PRLB ) shareholders capped last year with plenty to celebrate.
The quick-turn manufacturer's stock price has tripled since it went public Feb. 24, 2012.
It was 2012's second-best IPO performer, tied withGuidewire Software ( GWRE ), says Cindy Profaca, managing director of IPOFinancial.com. As of the March 15 close, Proto Labs' stock was up 192% since it came out of the gate.
Proto Labs is an online, tech-enabled manufacturer of custom parts for prototyping and short-run production. It provides customers with real parts made of various plastics and metals real fast to product developers, who are under increasing pressure to bring their finished goods to market faster than rivals. It uses computer numerical control, or CNC, machining and injection molding to manufacture custom parts. A CNC machine is a computer-controlled milling machine. It carves the desired part out of plastic or metal.
Proto Labs' value proposition is all about speed. It's the world's fastest producer of injection molded or CNC machined parts, Chief Executive Brad Cleveland told IBD.
The company's secret sauce lies in its proprietary software. Its Web-based interface and software automate many of the manual and time-consuming processes typically required to obtain custom CNC machined or injection molded parts from conventional suppliers. Customers upload a 3D computer-aided design ( CAD ) file of their required part through its website, and often within minutes its software analyzes the manufacturing potential of the product and, if it's able to make the part, returns a firm price quote with any recommendations for design modifications.
Once a customer places an order, Proto Labs' software automates processes such as mold design, which normally require skilled labor. As a result, it can quote orders in minutes. And it can ship parts in as little as one business day for a premium price.
"Proto Labs created a new service that's unprecedented," said William Blair & Co. analyst Brian Drab. "They have developed a system that has seamlessly integrated a collection of proprietary software applications with a manufacturing operation that's highly tuned for quick-turn manufacturing."
Proto Labs has developed a process where it can make injection molded parts overnight, says Drab, and at a 60%-plus gross margin. He says it can take its competitors, the traditional injection molding shops, three months to make the same parts and it costs them more to do it.
Proto Labs boasts a business model and a track record that have made heads turn on Wall Street.
"Investors recognize this is a one-of-a-kind, sophisticated operation and that the company is only beginning to penetrate its addressable market and 30%-plus revenue growth with 50% -plus return on invested capital is impressive," said Drab.
Proto Labs' customers include product developers and engineers of all stripes. Drab says one of the "beauties" about the company is no one customer accounts for more than 2% of sales and less than 10% of its revenue comes from Fortune 1,000 companies.
That's a sign Proto Labs is still in the very early stages of building its market, he says. Another sign: Drab says since its inception in 1999 through Sept. 30, 2012, Proto Labs has filled orders for around 26,000 product developers and has roughly 275,000 customers in its database that represent current or future users of its services. Overall, adds Drab, there are more than 3 million users of 3D CAD software globally, almost all of which are potential customers.
Proto Labs offers its services in the U.S. -- its biggest market -- Europe and Japan. Its manufacturing operation in Europe is located in Telford, England, which services the entire EU. Its manufacturing operation in Japan is in Tokyo and only services Japan. Any other location in the world, it exports from the U.S.
Piper Jaffray analyst Troy Jensen says the total addressable market for CNC machined and injection molded parts is around $80 billion in North America. Even if 5% of that was in Proto Lab's target market, he estimates it would still be a $4 billion opportunity for the company in North America alone.
On a global scale, Proto Labs has penetrated less than 1% of its addressable user market, he estimates.
"There's a huge opportunity for these guys to add new accounts and take share from the traditional machine shops," he said.
Judging from its results, Proto Labs has been gaining lots of momentum. Earnings gains have accelerated in each of the past three quarters. In the most recent fourth quarter, released Feb. 13, earnings soared 121% to 31 cents a share, topping views. Sales grew 31% to $33.6 million, also ahead of analysts' forecasts.
But Cleveland says because the 2011 fourth quarter was a "little soft," it made the 2012 fourth quarter look a lot better.
"It was pretty good," said Cleveland. "But we think we can do better. And I think as we go forward, we will work hard to do that."
Cleveland's growth strategy involves stepping up Proto Labs' direct marketing and sales efforts to find, and acquire customers in the U.S., Europe and Japan at a faster and faster pace.
Another initiative involves enhancing the size and complexity of the materials of the parts it makes, says Cleveland. Keeping that in mind, it recently announced the availability of stainless steel and other new metals through its Firstcut CNC machining service. And it now has the ability to make high-temperature plastics through its Protomold service.
The third prong to Cleveland's growth strategy involves adding more manufacturing processes. For the past several years it's been working on the ability to mold metal parts.
Analysts polled by Thomson Reuters expect Proto Labs to stay on the growth track. They see 2013 earnings rising 24% to $1.33 a share. They expect a 23% gain in 2014.
It uses no 3D printers. It only uses injection molding and CNC machining. Stratasys, 3D Systems and ExOne make equipment as well as offer a service to make parts, primarily on 3D printing equipment, says Drab. He says many engineers use a 3D printer for an early-stage design and then go to Proto Labs for the engineering-grade parts.