What is your company worth?
The market capitalization of ARC Group Worldwide, a metal and plastic injection molder, has swung wildly in the past 52 weeks. From 2007 through most of 2013, the company’s market cap was quite steady (and quite low) and its stock traded in a band of roughly $2 to $4 per share. That was back when the company was primarily positioned as a metal injection molder—hardly a boring business, given its 20 percent plus per year annual growth rates.
In December of last year ARC Group announced creation of a new division, 3D Material Technologies, focused on utilizing ARC’s experience in 3D printing, rapid prototyping, short run production, and tooling. Soon after, the company bought five additive manufacturing machines, three from 3D Systems and two from EOS.
Even though 3D printing services make up less than 5 percent of ARC Group’s sales, the company suddenly became an investment play in the overhyped 3D printing phenomenon.
ARC made other significant investments in the past year, and when its earnings per share recently came in below expectations, the vultures leaped. Now the company has delayed release of its most recent 10-K and has received a delinquent notice from the Securities and Exchange Commission. Figuring out the financials on new privately owned acquisitions has slowed the reporting process, says CEO Jason Young, who opened a recent earnings conference call with this statement: “Given our focus on technology, we’ve made it a priority to utilize 3-D printing, robotics, automation, software and outline tools to pioneer the next wave of manufacturing.”
One of the issues with ARC Group is that it is heavily controlled by outside financial people. According to the 2013 10-K, the Brean Murray Carret Group owned 61.5 percent of ARC Group’s stock.
As Robert Schad (founder of Husky) will tell you, VC people are not long-term thinkers. Nor do VC people generally understand manufacturing, and that goes double for injection molding.
Despite its impressive technical bench and well-deserved record with award-winning metal injection molding (MIM) designs, there are some other red flags with ARC Group Worldwide.
- Four customers represented 37 percent of total revenues in fiscal year 2013.
- The fastest growth for MIM is in Asia (particularly in electronics) where ARC Group does not have a strong market position.
- One of its bread-and-butter domestic businesses, firearms, declined in the fourth quarter, contributing to an overall drop in organic growth. FloMet operations (a MIM unit) slowed as key product life cycles ended. Business mix at FloMet seems to be tilting toward less-profitable consumer accounts.
I can’t blame management for trying to put some life into the stock price. But 3D printing at ARC is strictly a service business—it is not comparable with machine-making leaders Stratasys or 3D Systems (which has its own issues as far as I’m concerned). What ARC is doing is very much in the incubation stage and whether it can build synergy with its first-class molding operations remains to be seen.
In my opinion, 3D metal printing (ARC calls it RapidMIM) is a nice extension of its MIM business in that it can offer very small quantities (no tool required) as a bridge to full production. 3D printing can also be used to make tool components. That’s not at all a new concept, and it has been very slow to get traction because of high costs.
Want investors to consider you a 3D printing play?
ARC Group needs to provide examples of applications that are benefitting from the one-stop shopping. Their biggest customers may have their own EOS machines and want to keep prototypes in-house for security reasons. And just what are the current utilization rates on those five 3D printing machines?
The combination of 3D printing and MIM is not a game changer. It’s a nice add-on. That’s all.