Proto Labs gets shaky welcome to big leagues

Results beat estimates, but the mold maker's shares were drilled by traders and fell 22 percent.

Proto Labs Inc., one of Minnesota's hottest stocks of the year, got a rough reception Thursday after releasing its first quarterly earnings report as a public company.

The Maple Plain-based maker of molds and quick-turn parts saw its stock price cut by $8.38, or 22 percent, to $29.48 per share despite narrowly beating first-quarter sales and earnings estimates.

Proto Labs earned $4.8 million, or 22 cents per share, compared with $2.4 million, or 19 cents per share, during the first quarter of 2011. Sales during the first three months of 2012 rose 34 percent to a record $30 million.

Traders knocked down the stock after management said increased research and development costs and manufacturing expansion in Minnesota and Japan will cut second quarter-profit margins and result in earnings per share of 16 cents to 20 cents per share on revenue of up to $31 million.

Proto Labs management had signaled earlier this year that revenue would slow from the torrid 50 percent-plus pace of the last couple of years. But that didn't stop Wall Street from bidding up the stock price in recent weeks to astronomical highs. Proto Labs, which went public at $16 per share in its February initial public offering, peaked at $37.68 on Wednesday.

After Thursday's fall, analysts at Piper Jaffray & Co. and Craig-Hallum Capital Group, whose companies also were underwriters of the IPO, placed 12-month target prices on Proto Labs of $40 and $42 per share, respectively.

Naved Khan, an analyst at Jeffries & Co., another IPO underwriter, has a "hold" on the stock and a target price of $27 per share.

Proto Lab executives said the company is making smart investments.

"We've always wanted to emphasize R&D more," Chief Financial Officer Jack Judd said Thursday morning. "We now have some live projects with costs attached that will be good for the company and shareholders in the long run. Our operating margin will be less in the second quarter."

Management said the company was performing well, adding customers, repeat business, generating ample cash and investing in promising technologies and people that made it a $100 million-revenue company in 2011, thanks to software that eliminates much of the programming and machining usually required for each customer order.

Proto Labs' proprietary software automates the process as molds and parts are made of plastic, steel or aluminum without much human contact.

CEO Brad Cleveland said the establishment of a "Protoworks" R&D facility on the Maple Plain campus, headed by chief technologist Larry Lukis, will result in a "material payback" on the stepped-up investment within two to three years.

Lukis, a veteran technologist and inventor, is the company's founder and single-largest shareholder.

"We strengthened our balance sheet in the quarter, enhancing our cash position and providing us with the financial resources necessary to pursue our growth strategy to drive revenue and enhanced profitability," Cleveland said in statement.

Neal St. Anthony • 612-673-7144

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