Sigma Labs: Seizing Alpha In 3-D Printing
Jan. 23, 2014 2:47 PM ET | About: SGLB
Disclosure: I am long SGLB. (More...)
The 3D Printing OEM market was on fire in 2013 as evidenced by the stock appreciation of pure-play printer manufacturers: 3D Systems (DDD) 93%, Stratasys (SSYS) 48%, VoxelJet (VJET) 90%, Exone Company (XONE) 226%, Organovo (ONVO) 399%. In the latter half of 2013 IPOs with just about anything to do with 3D Printing - such as Cimatron Ltd., Groupe Gorge, Arc Group Worldwide - received immediate attention from investors. Surprisingly Sigma Labs (OTC: OTCQB:SGLB), one of the most interesting stories in this market, is still widely unknown and often misunderstood. For most investors who do not consider micro-cap stocks for investing I would ask you to think differently about Sigma because GE Aviation does; it is betting its $3.5 billion LEAP engine program on Sigma Labs delivering its PrintRite3D® product. To those who follow Sigma this is old news, May 2013, but current events have created an alpha opportunity for new investors to now benefit substantially.
I waited until a pivotal moment in Sigma's journey to prepare this article. Sigma Labs is a financially healthy micro-cap that is currently undervalued and poised for extensive appreciation. It has an excellent management team, a portfolio of diversified revenue streams under development, and is highly differentiated since it uniquely owns its market niche. However, share price has recently declined due to the private placement of stock to fund its product roll out and the scheduled unlocking of shares from a previous private stock placement. On January 17, 2014, Sigma shares began their rebound. While investment risks are real with any small company, Sigma's potential is tremendous making it worth a hard look by any investor seeking alpha returns in the 3D Printing market.
2013 Performance
Last year was pivotal for Sigma Labs' stock as it grew 1,275% and gained substantially in trading volume as shown here.
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The most significant factor in Sigma's growth was execution on their strategy to commercialize PrintRite3D®, an in-process closed-loop quality assurance system (IPQA). What is unique about PrintRite3D® that it commands such remarkable value? To answer this question you must first understand the profit drivers for 3D print manufacturing (not prototyping) of intricate-geometry metal parts that must perform under high-stress.
Profit in Additive Manufactured (3D Printed) Metals Parts
The metal parts market, especially for specialty metals like titanium, is projected to be 3D Printing's fastest growing segment due to escalating demand in the aerospace, aviation, defense, power generation, automotive, and medical industries. Why these applications? Each industry benefits from the following:
Sophisticated, Unique Designs - 3D Printing makes possible higher functioning designs. GE Aviation redesigned its newest generation LEAP Engine nozzles specifically for 3D Printing because it allows for forms that could not be manufactured any other way. This design virtually eliminates damaging buildup that has plagued jet engines since their inception. Many industries have similar situations that 3D Printing can improve on.
Reduction in Parts - 3D Printing allows for parts with fewer pieces. Again, GE's LEAP Engine nozzles can be made as a single part where 18 parts were previously required. See "Additive Manufacturing - The Next Industrial Revolution" on YouTubedotcom.
Reduced or Eliminated Assembly - When a 3D Printed part requires more than one piece - i.e., elements require movement -parts can often be printed together in their final assembled form which saves tremendous time and cost.
Less Weight, Greater Strength -3D printed parts often can be designed to be durable and higher functioning while requiring less material - e.g., 25% for GE's LEAP Engine nozzle.
3D Printing, however, currently has two major drawbacks. Compared to traditional casting, welding, or machining manufacturing methods, additive manufacturing is slower and has its own issues with imperfections due to process variations. Any system that can minimize these quality issues will accelerate production which unlocks the design benefits enumerated above. PrintRite3D® is doing this and is why it is a game changer for these industries.
PrintRite3D®'s Added Value: Closed-Loop Quality Assurance
What is crucial to understand about PrintRite3D® is that it continuously monitors the conditions for properly melting of the metal as well as the accuracy of its geometric form. GE is a great example of this importance. GE has asked them to develop PrintRite3D® to the point where it will operate as a "closed loop"; in other words feed information back to the printer so it can adjust real time. GE's key concern, and what Sigma Labs is best prepared to address, is unmelted metal powder entrapment in the additive manufacturing process. In the words of Christine Furstoss, Technical Director for Manufacturing and Materials Technologies at GE, "we have a joint technology development agreement with Sigma Labs Inc., to develop in-process inspection technologies of additive components with the goal of reducing production time up to 25 percent." PrintRite3D® system's sophisticated algorithms give it the ability to anticipate when unmelted powder may become entrapped. This ability is a key value to industries like aerospace, aviation, defense, or power generation where parts must endure incredible stress.
Competitive Position
No company has yet announced their intent to develop a "closed loop" system with PrintRite3D®'s capabilities of assessing both internal quality and adherence to geometric tolerances. Because of Sigma's multiple patents, its lead in development, and its team's specialized knowledge, it is unlikely that another company could anytime soon enter this niche.
Mark Cola, President & CEO, Sigma Labs, and his team of scientists, base PrintRite3D® on their years of research at Los Alamos National Laboratories. He was the leader of the Manufacturing Science & Technology group which researches the metallurgy and performance of metals in high-demand welding applications; a mirror of how 3D metal printing operators. While there his group helped develop the original approach to metal 3D Printing.
In Sigma's words taken from its annual report, "Sigma Labs continues to stay focused on the three problems that are plaguing metal 3D Printing for high-end components: quality, geometry, and productivity. For addressing quality issues we continue to be successful in implementing our PrintRite3D INSPECT™ product with marquis customers in aerospace. For complex geometries and critical parts like those for aerospace, biomedical and defense parts, it is currently very difficult to measure the geometry of the part after it is built. Complex internal passageways make it difficult to scan the outside of the part. Currently, the only way to inspect a 3D part is after the printing process is complete and with X-Ray CAT scanning. This is very expensive, takes a long time, and could cost more to inspect the part than it costs to make the part. Our PrintRite3D® DEFORM™ module will measures parts as they are being built so the user does not have to wait until the end of the process and could save money by avoiding expensive post-process inspection technologies."
2014 Investor's Thesis
My thesis for Sigma Labs stock this year is simple; 2014 is the year when the past two years of product development, patenting, and establishing key partnerships pays off in real revenue. 2013 was a year of successful execution on key elements of their PrintRite3D® commercialization strategy as well as the startup of new revenue streams - i.e., their own low-cost 3D metal printer (Metal3DX), licensing their dental patent, forming key partnerships. Here is a list of key announcements in 2013:
December 26 -- Delivers PrintRite3D® Systems To Leading International Aerospace Company
December 23 -- Development Of Technology To Support Low Cost 3d Metal Printer
December 16 -- Sigma Labs, Inc. Signs An Agreement With Metronic Systems, LLC. To Accelerate Commercialization Of Printrite3d® Deform™ Quality Inspection Module
November 18 -- Awarded Contract Extension From Honeywell Aerospace For Additive Manufacturing Support Of DARPA Open Manufacturing Program
November 14 -- Sigma Labs, Inc. Obtains Exclusive Patent Rights For Advanced Dental Implant Technology
October 25 -- Sigma Labs, Inc. Receives Second Contract From Los Alamos National Laboratory For Advanced Manufacturing Technology As Part Of Larger National Security Program (Nuclear Weapons Stewardship Consulting)
September 24 -- Sigma Labs Part Of Team Awarded Grant Of $5 Million For Additive Manufacturing Research
August 1 -- MOU With Los Alamos National Laboratory To Identify And Commercialize New Technologies For 3D Printing Of Metals
May 6 -- Contract From GE Power Generation For New Manufacturing Technology To Repair Gas Turbines
April 24 - Signing Of A Joint Venture Agreement With GE Aerospace
March 14, 2013 -- MOU To Explore The Design And Build Of Next Generation Concepts For 3d Metal Printing Machinery With Interactive Machines
Feb. 6 2013 -- Sigma Labs, Inc. Files Provisional Patent Application To Further Extend Printrite3d™ Capabilities
2014 is the year when Sigma Labs will realize material revenue from PrintRite3D® and will expand their portfolio of patents, licenses and products based on their MOU with Los Alamos National Laboratories and their collaborations with Metronic Systems and Interactive Machines.
Now that they have delivered two new PrintRite3D® systems (Dec. 2013) the company will begin monetizing the last couple of years of product development into substantial revenue. They expect to receive $975,000 in revenue from these two systems alone, and will being expanding beyond their current collaborators. From their December 26, 2013 press release, "PrintRite3D® eliminates the current problem in 3D Printing of high inspection costs for critical 3D printed metal parts, thereby enabling additional applications of Sigma Labs' technology to industries other than the aerospace industry which are presently too cost-sensitive for the current technology's price point." Their partnership with Metronic Systems gives them added expertise and manpower to help them expand more quickly.
Current Buying Opportunity
The chart below shows Sigma's stock price peaked in late November 2013 and then declined slowly until a few days ago. This decline was the result of two events.
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First, in order to acquire working capital to fund expansion Sigma privately placed 43,750,000 shares of stock with Rockville Asset Management Ltd. for $3.5 million ($0.08 per share equivalent). Second, and perhaps more importantly, 120 million in shares that were issued July24, 2013, became unlocked on January 18, 2014, and now can be traded. Investor wariness regarding these events depressed the stock price until now. Sigma's share price began rebounding January 17, a day before the unlocking of shares. It continued significant gains on the next trading day, January 21, for a cumulatively 43.9% rise ($0.116 to $0.167). While this rise is significant, having overcome its dilution issues, it is my opinion that this stock will surpass its December 2013 peak in the next three months when it reports first quarter earnings.
Conclusion
Many micro-cap stocks rely on a single avenue of income for their success. The management team is often newly formed, although the President or CEO may have had success in the past. In other words, you are taking a significant gamble to achieve a significant payoff. Contrast that investment risk with Sigma Labs' assets. They have:
A unique, defensible niche in the fastest growing, highest-margin category of a market sector many are calling the most disruptive technology of the next 50 years.
A team of leaders and scientists that have been together for years and who possess unique expertise to the degree that it is sought after by industry leaders as consultants.
A proven ability to partner and collaborate with GE, Honeywell, Boeing, and a number of other global companies in order to develop and refine their product offering in the most demanding situations to face 3D Printing.
An ongoing relationship with Los Alamos National Laboratories to the extent that they are contracted to patent and commercialize their technologies.
PrintRite3D® just received a tremendous vote of confidence in that two new systems are now being installed at an international aerospace manufacturer for substantial revenue.
A portfolio of revenue opportunities now being developed which are not yet reflected in the company's value because they are too new to estimate returns. Specifically, a dental implant patent, a low-cost 3D metal printer (Metal3DX), and contracts and patents with Los Alamos National Laboratories.
Sigma has first mover advantage in an enabling area of the most attractive segment of the 3D Printing market. They possess the wherewithal to succeed, both internally and through partners who lead their markets. GE alone is expecting by 2020 to be producing more than 100,000 different additive parts Aviation alone. Finally, Sigma's stock price is currently depressed due to its stock dilution and unlocking of shares, which provides a good time for entry.
Resources: Here are some suggestions sources to help you perform your own due diligence:
SigmaLabsIncdotcom
YouTube - "The Story Behind Sigma Labs, Inc."
ideaslaboratorydotcom - "Christine Furstoss: Adding the Next Layer to Additive" - Sigma Labs and GE
YouTube - "Additive Manufacturing - The Next Industrial Revolution" - overview of GE's program
BloombergBusinessweek - "GE Turns to 3D Printers for Plane Parts" - overview of GE's program
Financials - sigmalabsinc.com; "Sigma Labs Will Outperform All Other 3D Printing Stocks over Next 3-6 Months" on 3dprintingstocksdotcom
IPQA (PrintRite3D®) - sigmalabsinc.com; jjsigmalabsblogdotblogspot.com
Additional disclosure: I am an active investor in a number of 3D Printing stocks and have traded positions in Sigma Labs since the spring of 2013. I plan to make no changes in my current Sigma Labs holdings for at least three months.
