Initiation of Research Coverage: Proto Labs, Inc.

Wednesday, April 4, 2012

William Blair & Company initiated research coverage of Proto Labs, Inc. (PRLB $35.13), an ultra-fast manufacturer of custom parts, with an Outperform rating and Aggressive Growth company profile.

Analyst Brian Drab estimated that the company, which provides a quick-turn solution for prototyping and short-run production of custom parts, would generate revenue of $123.7 million in 2012 and $154.6 million in 2013.

"We believe Proto Labs' ability to turn customer designs into finished, engineering-grade parts is unmatched globally in terms of both speed and price (for those parts that the company's process accommodates)," Drab said. "The value of the company's service lies in the seamless combination of proprietary software and part-manufacturing capabilities. We believe the company is just beginning to penetrate its addressable market, as only about 20,000 CAD users have ordered parts from Proto Labs—a small fraction of the almost 240,000 product developers in Proto Labs' database and the millions of CAD users worldwide. We expect continued strong growth to be a function of increased awareness of the company's service, deeper penetration at existing accounts, and broadening of the service offering. In addition, product development cycles continue to compress. Developers are under constant pressure to find ways to bring products to market faster and at a lower cost. These trends should continue to stimulate demand for Proto Labs' service."

Drab continued, "Proto Labs has experienced rapid growth since its inception 12 years ago. After a pause during the economic downturn in 2008-2009 (which only temporarily flattened the company's growth trajectory), Proto Labs reported 48% sales growth in 2010 and 52% growth in 2011. In addition, margins have been expanding recently, with operating margin increasing from 19% in 2009 to 28% in 2011. We believe our forecast for annual revenue growth of 25% in 2012 and 2013 could prove conservative, given it incorporates a material step down from the company's recent growth rates. We believe it is likely that company revenue will grow faster than 25%, and given the significant operating leverage inherent in Proto Labs' operation, we see the potential for material upside to our 2013 earnings per share forecast of $1.20."

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