Macro Headwinds Provide Good Entry Point For Proto Labs, Says Canaccord

Shares of Proto Labs Inc (NYSE: PRLB) have declined "substantially" due to U.S. macro concerns regarding industrial production, according to Bobby Burleson of Canaccord Genuity. The stock is lower by nearly 7 percent over the past five days alone and lower by more than 20 percent over the past year.

Burleson commented in a research report on Thursday that the selloff in Proto Labs' stock represents a "solid entry point" given its strong business model and an attractive valuation.

Business Model

According to Burleson, Proto Labs' proprietary software makes it a leader in the space, and there is unlikely to be a challenger to its "leading position" in quick turn CNC machining and injecting molding services.

The analyst added that Proto Labs' "strongly ramping additive" manufacturing business represents a tailwind to gross margins as its recently acquired facilities in Europe increases its capacity utilization over the remainder of 2016.

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In addition, Proto Labs is in a strong position to grow its share of unique product developers through an improved marketing effort.

Valuation

Burleson continued that Proto Labs' exposure to customer R&D activity has made it a "lagging indicator of industrial demand." In fact, the company hasn't seen any macro-related weakness until the first quarter of this year compared to some of its peers that saw weakness as early as mid-2015.

As the macro environment improves over time, the company at the very least can maintain its market share, which justifies "at least" a valuation of 15x EV/EBITDA on 2017 estimates. By comparison, the analyst pointed out that the range prior to the macro-related slowdown has been roughly 15x to 20x.

Shares remain Buy rated with an unchanged price target of $65, which implies a 14.6x multiple to the analyst's 2017E EBITDA.

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