Citi Goes Contrarian, Says Stratasys Is Now A 'Buy'

In a report published Thursday, Citi analyst Kenneth Wong upgraded the rating on

, while maintaining the price target at $35. The analyst believes that the Street is overestimating the impact of soft printer sales on the company's earnings. "We estimate consumables can easily generate mid-30s EBIT margins and can help sustain earnings while the company works through excess customer printer capacity," Wong explained. Despite the weakness in printer sales, the analyst expects consumables to generate "steady growth" and to play a bigger role in the revenue mix. On the other hand, the analyst also believes that uncertainty has peaked, with the sector valuation declining significantly. The withdrawal of the FY15 guidance by Stratasys also indicates that uncertainty might have peaked and that the company is likely to have identified the source of weakness in order to implement an action plan. However, in the event that consumables growth decelerates to a greater degree than anticipated, "Stratasys would not be able to leverage this highly profitable revenue stream," the Citi report cautioned. "While there remains uncertainty around when printer capacity will normalize, we believe a clear sightline to better earnings power provides investors with the catalyst needed to get more constructive," Wong added. The CY16 estimates have been raised for the company.