Proto Labs has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.4%. The stock now trades at $48.96, marking a 31.8% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Proto Labs, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Proto Labs Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons we avoid PRLB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Proto Labs’s sales grew at a sluggish 2.4% compounded annual growth rate over the last five years. This was below our standards.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Proto Labs’s operating margin decreased by 7.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Proto Labs’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 3.3%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Proto Labs, its EPS declined by 9.3% annually over the last five years while its revenue grew by 2.4%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Proto Labs, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 33.1× forward P/E (or $48.96 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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