Business Description
UFP Technologies (UFPT) is a Georgetown, MA based designer and converter of foams, plastics, composites, and natural fiber materials that sells in six main markets: medical, automotive, consumer, electronics, industrial, and aerospace & defense. The company sells largely custom designed products manufactured in 10 plants across the country to a base of several thousand customers. UFPT has been increasingly focused on the medical market recently, and that is now the largest end market at almost 40% of sales and growing at double digits. The company started providing sales by end market in 2014 10-K and its website has a fairly detailed list of the types of products that UFPT sells. Basically, the company sells any kind of custom foam product you can imagine and it aims to sell that in the most highly value form.
The stock price is $20/share, there are 7.2m diluted shares, market cap is $144m, the company should end the year with about $30m net cash, for a year end EV of $114m. Adj EBIT the past 5 years was $14m, $15m, $17m, $17m, $13m. Tax rate is 34%.
For reference, UFPT has been the subject of two thorough writeups on VIC before: in October 2008 at $6.75/share by andreas947 and in April 2011 at $17.82/share by madler934.
Thesis
This is a well run company that has done well over time. The business has gotten progressively better over the past 10 years as the company has grown from a pipsqueak to a decent size and focused more heavily on niche markets. EBIT margins over the past 5 years have been in the 12% range, though they dipped to 9.4% in 2014. Adj pretax ROTIC has been in the mid 20% range ex-cash. The company has been building up cash in the recent past and has gone from a net debt position in 2006 to $31m net cash at 2014 year end.
The company has been spending quite a bit on capex in the past several years and will do so through 2017. Capex had been in the $1-4m range for a number of years (compared to depreciation of $3m), and capex was $12m in 10212, $6m in 2013, $13m in 2014, and should be north of $12m in 2015. This is the result of plant consolidation and ERP installation projects. For instance, in 2015 Q1, the company spent $7m capex on a new headquarters and plant in MA.
As a result of these initiatives and as the result of some sales weakness in a few markets, EBIT margins were markedly down in 2014, from the 12% range of prior years to 9.4%. I expect that EBIT margins will increase as these initiatives roll through and think that 11% EBIT margins is a reasonably conservative normalized number. At current sales levels, this foots to pretax ROTIC of 18%. Assuming $138m in sales in 2015, that is $15m EBIT, and at a 34% tax rate NOPAT = $10m, or about 11.5x EV/NOPAT. NOPAT is basically the same as net income.
Organic sales growth has been very modest over time, averaging about 1% over the past decade. However, the company has been able to show increased profitability over time as it shifts its mix towards higher margin markets and it supplements its growth with bolt-on acquisitions. I expect both these trends to continue.
The CEO is R. Jeffrey Bailly, age 53, and he has been in the position for over 20 years, since 1995. He owns 8.7% of the company and insiders in total own 15.3%. CEO compensation averages under $1m per year. He writes a letter to shareholders each year, available on the website back to 2005. In general, I think the company is fairly well run and that management seeks to maximize long-term intrinsic value.
In June, the company announced a share repurchase program for $10m of shares. It has never repurchased shares before, despite reasonably sized cash balances and a cheap stock. In the release, the CEO stated, "Our $28 million cash balance, strong cash flow, attractive stock price, and exciting future growth opportunities all factored into our decision to authorize the repurchase of UFP's stock".
In summary, I think this is a good company available at a reasonably attractive price. I do not see many like companies with no debt and minimal risk of obsolensence at under 12x earnings. After it completes the consolidation projects over the next year or two, it should start producing fairly liberal amounts of FCF. Management incentives are aligned with shareholders and they have signaled publicly that they think the stock is cheap. This stock isn't going to the moon but I think it should compound reasonably well over time.