Stratasys leads growth industry

On "Star Trek," teleported objects materialized from thin air in seconds. At Stratasys Inc. in Eden Prairie, it takes longer -- two hours for a monkey wrench or 10 hours for a coffeepot.

Stratasys does it not with a Star Trek teleporter, but with a machine that creates product prototypes out of nothing more than a fine plastic spray and the digital output from a computer-aided design workstation. Those models have become an important step in refining new product designs for firms in consumer, automotive, aerospace and medical manufacturing.

"Stratasys helps customers cut down on product design time," said Clint Morrison, an analyst at Feltl & Co. in Minneapolis "That's money well spent."

And that is why many analysts -- and even one noteworthy institutional investor that recently purchased a large stake in the company -- are bullish on Stratasys' long-term prospects. The 19-year-old company is a leader in the growing $1.14 billion rapid prototyping industry.

Still, it's inherited some of the problems that come with being a growth technology company. Quarterly results are uneven and company guidance sometimes misses the mark, a surprise Wall Street is never fond of. That uneasiness has attracted many short-sellers, investors who profit by betting that a stock's price will drop.

Their actions tend to exacerbate the swings in the company's stock price, analysts say, and dilute the big picture. Annual revenue and earnings show steady growth.

Stratasys, which has 400 employees, has 10 percent of the world market based on revenue, but 44 percent of the installed systems, largely as a result of volume sales of its lower-end machines, said Terry Wohlers, a prototyping consultant in Fort Collins, Colo. He and other analysts believe the market size is likely to increase based on the widespread use of computer-aided design.

In the past year, Stratasys' stock has hit peaks of $30 and nearly $28 a share, with sharp drops in between. The stock closed Friday at $21.57 -- up from the $18 range in March -- after first-quarter results exceeded expectations. Stratasys earned $3.8 million in the first quarter, up about 20 percent, on revenue of $30.7 million, up about 12 percent. So far, Stratasys sales haven't been damped by the economy, although that is a concern, the firm said.

"The stock has been on the rise for a number of years, but you get these quarterly gyrations," said Eric Martinuzzi, an analyst at Craig-Hallum in Minneapolis. "Still, Stratasys is the market leader, and in the last quarter they showed rising profits at a time when their main competitor reported lowered profits."

Even before those results, Fidelity Management bought its first stake -- a 5.78 percent block -- in the first quarter.

Stratasys makes money by selling the prototyping machines, the plastic that they use and a new service in which the firm makes prototypes for customers.

"Stratasys is selling plastic for a lot of money," Morrison said, noting that the company doesn't disclose its profit margins by business segment. "They buy it for $1 a pound, process it and put it into cartridges, then sell it for $100 a pound."

The strong first-quarter earnings also have led some to wonder why Stratasys hasn't raised its financial guidance for 2008 -- and to speculate that the firm may plan to broaden its market share by cutting its machine prices, as it has in the past.

"People speculate that because we are a firm believer in lowering prices to get higher unit sales volumes," said Bob Gallagher, the chief financial officer. A prototype machine introduced in 2002 for $29,900 today sells for $18,900, he said. (The largest machines sold by Stratasys and others cost $400,000 or more.)

Analysts say it is the process of making prototypes that separates Stratasys from its competitors. The Stratasys machines spray a proprietary mixture of plastic onto a flat surface, building up a three-dimensional shape by depositing thousands of microscopic plastic layers, then baking the resulting model at 170 degrees. Competitors use other materials and heat sources.

Some prototype models are impressive, such as a mouse-sized bicycle with turning wheels, or a palm-sized set of meshing plastic gears that turn. The moving parts weren't assembled from separate pieces; they were made by alternating plastic layers with a wash-away polymer that leaves some parts free to turn, Gallagher said.

The functionality of today's prototypes is limited -- the plastic wrench looks real but isn't strong enough to turn bolts, and the coffeepot made coffee only as part of a test. But Gallagher said Stratasys is well-positioned for the day when rapid prototyping machines make the jump to handling full production for products already made of plastic.

That's not practical today for most manufacturers, said Todd Grimm, a consultant in Edgewood, Ky. While it would save up-front costs for tooling, it would produce parts more slowly and expensively than injection plastic molding does, he said.

"It may be a decade or more before you see a radical change like that in manufacturing," he said.

Steve Alexander • 612-673-4553