St. Anthony: Proto Labs learns a long-term lesson

Firm chose investments over short-term profits, and Wall Street reacted harshly.

Brad Cleveland, Proto Labs CEO

Proto Labs CEO Brad Cleveland and nearly 600 associates have spent more than a decade building a highly profitable company that they say is world's fastest provider of customized computer-machined prototypes and parts.

In February, the company went public in one of Minnesota's most successful IPOs in years.

In May, the company reported first-quarter sales and earnings above Wall Street's expectations. But the company also said that increased research spending at its Maple Plain headquarters and adding capacity at a new plant in Rosemount would mean narrower profit margins for the next several quarters.

Investors reacted harshly, slashing the company shares by 36 percent. In short, the company lost more than $300 million in market value that day for choosing a long-term view over short-term profits.

Fred Zimmerman, the retired industrialist and manufacturing professor, applauds Proto Labs.

"There are a lot of companies morphing into 'rapid prototyping,'" Zimmerman said. "But Proto Labs is doing it better. Their gross profit margins are very high. They ultimately will satisfy investors, I believe. [But] what they do requires training, equipment and skills."

Proto Labs offers the latest example of the tug-of-war between long-term investments and short-term profits.

Brian Smith, president of PCM Management of Eagan, is a Proto Labs believer and a classic long-term investor.

PCM has invested about $14 million in Proto Labs through three rounds of private fundraising since 2005. PCM sold a piece of the original investment to another institutional investor for $14.5 million in 2008. Today PCM's stake in Proto Labs is worth about $100 million.

In 2005, Smith chatted for a couple of hours with Proto Labs founder Larry Lukis, 63, a veteran Twin Cities inventor, and Cleveland, 53, a computer scientist and even-keeled manager who had worked at Honeywell and MTS Systems.

"They had an excellent value package: the ability to get people prototypes, real parts and short production runs in a day or two," Smith recalled. "Their cost is similar to competitors', but they don't have to work with designers and mold makers and plastic shops that can take days or weeks."

The inventor

Lukis was frustrated by how long it took him to get prototypes and parts to boost the performance of copying machines he modified while working as the chief inventor at company called LaserMaster. He left that company in the late 1990s to begin research on developing software to automate prototyping.

Today, his software allows customers to ship design specifications over the Internet to Proto Labs, which results in a near-instantaneous bid. Proto Labs believes it has leapfrogged the old model of injection-mold tooling because the software automates much of the job typically done by product designers and machinists.

Robert McGill, a veteran Boston-based engineering consultant who's worked in the industry for 30 years, called the Proto Labs software "a quote engine" that competitors can't yet approach for speed, accuracy and economy.

McGill, who has done work for Proto Labs, said the company has disrupted the economics of the tooling trade, and makes rapid injection-molded parts practical for many new applications.

Halfway back to stock's high

Meanwhile, the stock price has recovered from a low of about $25 during the day it released earnings on May 3 to $32.15 on Friday. That puts the shares about halfway back to their all-time high of $38.65.

And three of four analysts who follow the company have a "buy" on the stock, with a median 12-month target price of $35 per share, according to Thomson Financial.

As important are the jobs Proto Labs has added -- about 400 in Minnesota in the past several years. Entry-level-to-veteran workers on the production floor are paid base wages of $12 to $30 an hour.

Jacob Emerick, who makes about $20 an hour as an injection molding technician, said last week that he couldn't afford college and had worked several jobs during and after high school. On a whim, he put in an application at Proto Labs in 2005.

"I had no previous knowledge of the plastics manufacturing industry, but came in with an open mind and hard-work ethic," said Emerick. "I will continue to learn and grow with the company."

He and his longtime girlfriend just bought a house.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

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