2008 | 2009 | ||||||
Price: | 6.75 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 45 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
Sign up for free guest access to view investment idea with a 45 days delay.
High Value Added, Service Oriented Business
We believe the company is more of a services business than a traditional manufacturer as it focuses on providing customized solutions to clients. The company still does some commodity work but doesn’t make as much margin on it. Due to this customized service focus, the company is much less asset intensive than a traditional manufacturing company. The company carries a modest level of inventories and management says close to 90% of inventories are carried pursuant to firm orders. The company is very much a job shop type manufacturer and there is often a lot of engineering work that occurs before an order is generated. As of June 2008 inventories were $8.9 million and accounts payable were $5.9 million indicating a major portion of inventories are financed through trade credit. Accounts receivable were $14.5 million as of June 2008 and management generally expects these to grow with sales. Net PPE as of June 2008 was $11.7 million which is modest compared to LTM sales of $106 million and LTM EBIT of $9 million. Capital expenditures have generally been close to D&A expense or about $2 million to $3 million per year. So the company is not very asset intensive. The result of this attractive business model is that management has been able to substantially improve sales and profitability while concurrently deleveraging the balance sheet. Net debt decreased from $14 million at year end 2002 to less than zero at year end 2007 while, over this same period, sales increased from $61 million to $94 million and EBIT increased from $1 million to $7 million.
Competitive Position
The company believes there are about 200 to 300 small, primarily mom and pop, foam fabricators in the U.S. The foam fabricating industry is highly fragmented. Most of these foam fabricators offer only one type of raw material for packaging or component products. The company believes its strongest competitive advantage is its ability to offer customers any type of foam or raw material which they want. The company likens itself to an auto dealer with a large lot who can offer every model of car and doesn’t care which one the customer buys. They feel this gives them a competitive advantage over their competitors who typically focus on just one type of raw material. Many customers appreciate the flexibility which the company can offer them. Furthermore, the three basic raw materials used by the company (urethane, polyurethane, and cross blended foam) are sold by their raw material suppliers to only 20 or 30 nationally authorized foam fabricators, which they rely upon to sell to end user customers. The company is an authorized foam fabricator for each of these raw materials and believes its direct access to these raw material sources is a major competitive advantage.
A second major competitive advantage is the company’s national network of plants which allows it to service larger, national customers on a “one-stop-shop” basis, which these companies find very attractive. The national network also allows the company to supply various raw materials from various plants. Most of UFP’s competitors cannot offer this service as there are very few with a national network of manufacturing plants.
The company believes the following strengths are also important to its competitive position: 1) its engineering expertise; 2) its ability to combine foams with other materials such as plastics and laminates; and 3) its ability to manufacture products in a clean room environment.
The interior packaging products industry has several national companies but the company’s engineered packaging products segment competes primarily with smaller independent regional manufacturing companies which generally market their products in specific geographic areas from neighboring facilities.
The company’s component products segment also competes primarily with smaller companies that concentrate on production of component products for specific industries. We believe the company’s national network of plants gives it an important competitive advantage in competing with these small regional companies.
We believe that the company is continuing to take market share from smaller competitors in both of its industry segments due to the competitive advantages discussed above.
Operating Strategies
The company has had strong growth recently despite the tough economic environment with solid improvements in sales and margins in Q4 of 2007, and Q1 and Q2 of 2008. While total sales were flat in 2007 versus 2006, the quarterly sales trend throughout 2007 was one of consistent improvement (see quarterly financial results below). We also think the recent Stephenson & Lawyer (S&L) acquisition (discussed below) could be significantly accretive and we think there is potential for other, similar such acquisitions.
Management seems to be doing an excellent job of driving improved profitability by increasing gross margins and controlling operating expenses while also increasing sales. A major reason for the improvement in gross margin is a focus on improving its book of business by replacing lower margin, less value added work with higher margin business. The company has an engineering sales force of 20 to 25 employees who are basically focused on solving customer problems, the more difficult and complex, the better. Many of these employees are specialized by industry and use their expertise to create customized solutions for customers. Furthermore, these engineering sales employees have been incentivized by senior management to seek to grow gross margin dollars and improve the book of business by adding profitable sales, not just chasing additional sales. Another factor contributing to improving gross margins has been reduced sales in the company’s automotive industry business, which is the lowest margin business among the industry segments, as lower margin automotive business is getting replaced with higher margin business in other segments.
Management has also incentivized plant operations management to improve gross margins. These plant general managers are highly focused on reducing manufacturing costs through lean initiatives, etc. There is a constant sharing of best practices type ideas among the 11 plant managers. These plant managers are told to basically assume that sales are going to be flat (i.e., the sales and marketing people fall down) and they get paid to improve profits independent of sales growth by taking costs out of the manufacturing process. Management estimates about 35 to 40 cents of sales dollars are represented by raw material costs such as foam (however raw material cost for molded fiber, made from recycled newspaper, is much lower at about 8 cents), about 30 cents are operating expenses and about 12 to 14 cents are labor related. Since raw materials represent the largest component of the total cost structure, plant managers focus their efforts on reducing raw material costs through less waste, etc.
Packaging products are custom designed and fabricated or molded to provide protection for fragile and valuable items, and are sold primarily to original equipment and component manufacturers. Molded fiber products are made primarily from 100% recycled paper principally derived from waste newspaper. These products are custom designed, engineered and molded into shapes for packaging high volume consumer goods, including computer components, medical devices, other light electronics, and health and beauty products.
Component products are fabricated and molded from cross linked polyethylene foam and other materials. The company also laminates fabrics and other materials to cross linked polyethylene and other foams. Component products include automobile interior trim, athletic and industrial safety belts, components for medical diagnostic equipment, nail files, and shock absorbing inserts used in athletic and leisure footwear. Cross linked foams have many of the same properties as traditional foams but include advantages such as ability to be thermoformed, availability in colors, better esthetics and abrasiveness, and enhanced resistance to chemicals and UV light.
The interior cushion packaging market has three primary sectors: 1) custom fabricated or molded products for low volume, high fragility products; 2) molded or die cut products for high volume industrial or consumer goods; and 3) loose fill and commodity packaging materials. The company serves primarily the first two sectors but does not materially serve the commodity packaging market.
The company markets and sells its packaging and component products in the U.S. primarily through direct regional sales forces comprised of skilled engineers, but also uses independent manufacturers’ representatives. The company’s sales engineers collaborate with customers and the company’s design and manufacturing experts to develop custom engineered solutions on a cost effective basis.
The company’s manufacturing operations consist primarily of cutting, molding, vacuum forming, laminating, and assembly. The company does not manufacture any of the raw materials used in its products. Raw materials are generally available from multiple suppliers but the company does rely on a limited number of suppliers of cross linked foam. The company believes that it is one of the largest purchasers of cross linked foam in the U.S.
Industry Segments Served
The company serves six primary industry segments. The medical segment includes customers like Johnson & Johnson, Depuy, and Biomet. This is probably the strongest and least price sensitive segment. The aerospace and defense (or military) segment has been solid but could be impacted by political changes. The electronics segment has also been strong with the consumer side weaker but the corporate side stronger. One example in electronics is the company makes the packaging for Blackberry units, sometimes using foam, sometimes plastic, and sometimes molded fiber. The customer likes that the company can supply three different kinds of packaging depending on its preferences. Automotive is most price sensitive segment and has the lowest margins. Auto segment sales have been declining in the current environment.
The company’s top customer in its component products segment is Recticel Interiors North America which represented 18% of total company sales in 2007. Sales to this automotive customer declined to about 14% of total sales for six months of 2008. The top customer in the packaging segment was BAE Systems which represented about 5% of total company sales in 2007. The company’s top 10 customers in 2007 represented about 44% of total company sales.
The company’s business with Recticel is related to a large, multi-year automotive industry contract based in the southeastern U.S. which the company secured in 2004 and which is contracted to continue through 2011. The contract is for interior door panel foam related work for the Mercedes M and R class SUV vehicles worldwide. The company bid on this business with Johnson Controls which is a tier one supplier to Mercedes. The company makes rough interior foam door panels molds and supplies them to Recticel who finishes them for Johnson Controls. The company maintains it has never had a pricing problem with this contract and is able to earn good margins on this business. Management seems to have a high degree of confidence in the long-term viability of this program and the company’s position in the program, even in the current brutal auto industry environment.
The company’s remaining automotive industry business primarily relates to its Detroit operations. These operations primarily specialize in supplying foam sunshades for automobiles. While there have clearly been some headwinds in this area, one offsetting positive is that the proportion of automobiles using sunshades in moon roofs has been increasing. We believe that while the company’s southeastern automotive contract business with Recticel / Johnson Controls is profitable, the company’s Detroit automotive business is not profitable but that its profitability has been improving markedly. We believe sales for the southeast business have been declining modestly and sales for the Detroit business have declined more significantly.
Management does not give specific sales or margin data by industry segment but has stated its largest industry exposure is under 30% of total sales (this is probably automotive) and gross margin dollar exposure is likely well below 30% because the automotive segment has the lowest profit margins.
Company gross margin for six months 2008 improved to 25.7% from 23.0% prior year with improvement primarily due to continued manufacturing efficiency initiatives and improvement to the quality of the company’s book of business (about 1.1% improvement across both segments) as well as leveraging of fixed overhead costs with higher sales (about 0.8% improvement across both segments). SG&A expense for six months 2008 increased to $9.9 million due to additional SG&A associated with acquired S&L operations (Component Products segment) of $830,000 and additional selling expenses of $595,000 (both segments) and normal inflationary activity.
Price per share |
$6.75 |
||||||||
Shares outstanding |
6.4 |
|
|||||||
Market value |
$43 |
||||||||
|
|||||||||
52 week range |
$4.94 |
$14.63 |
|||||||
Income statements |
|
|
|
|
6mos |
6mos | |||
FYE 12/31 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2007 |
2008 | |
Sales |
$61 |
$61 |
$69 |
$84 |
$94 |
$94 |
$45 |
$57 | |
EBITDA |
$3 |
$3 |
$5 |
$5 |
$8 |
$10 |
$4 |
$6 | |
EBIT |
$1 |
$0 |
$2 |
$2 |
$5 |
$7 |
$3 |
$5 | |
Net income |
($0) |
($2) |
$1 |
$1 |
$3 |
$4 |
$2 |
$3 | |
EPS - diluted |
($0.05) |
($0.34) |
$ 0.17 |
$ 0.14 |
$ 0.45 |
$ 0.71 |
$ 0.26 |
$ 0.44 | |
Cash flow statements |
|
|
|
|
|
6mos |
6mos | ||
FYE 12/31 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2007 |
2008 | |
Net income |
($0) |
($2) |
$1 |
$1 |
$3 |
$4 |
$2 |
$3 | |
Dep & amort |
$3 |
$3 |
$3 |
$3 |
$3 |
$3 |
$1 |
$2 | |
Non cash adjust |
$0 |
$1 |
$0 |
$0 |
$2 |
$2 |
$1 |
$1 | |
Working capital chgs |
($0) |
($1) |
($2) |
($3) |
$5 |
$1 |
($2) |
($3) | |
Cash fr operations |
$3 |
$1 |
$1 |
$1 |
$12 |
$10 |
$3 |
$3 | |
Capital expenditures |
($1) |
($1) |
($2) |
($1) |
($2) |
($2) |
($1) |
($1) | |
Dividends |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 | |
Share repurchases |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 | |
Acquisitions |
($0) |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
($5) | |
|
|
|
|||||||
Est. free cash flow |
$2 |
$1 |
$1 |
$3 |
$6 |
$7 |
$3 |
$4 | |
Balance sheets |
|||||||||
FYE 12/31 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
6/30/08 |
||
|
|||||||||
Cash |
$0 |
$0 |
$0 |
$0 |
$1 |
$9 |
$5 |
||
Total assets |
$35 |
$37 |
$40 |
$44 |
$39 |
$46 |
$49 |
||
Total debt |
$14 |
$16 |
$18 |
$10 |
$9 |
$8 |
$7 |
||
Shareholder equity |
$14 |
$13 |
$14 |
$15 |
$19 |
$24 |
$28 |
||
|
|
||||||||
Valuation & Valuation Ratios |
|
||||||||
|
|||||||||
Market value |
$43 |
Enterprise value / EBITDA |
3.8 |
|
|||||
Net debt |
$2 |
Enterprise value / EBIT |
5.0 |
|
|||||
Preferred stock |
$0 |
Enterprise value / Cash fr Ops |
4.5 |
||||||
Enterprise value |
$45 |
Ent. value / Free cash flow |
7.5 |
||||||
Enterprise value / Revenues |
0.5 |
||||||||
|
|
6mos |
6mos | ||||||||
2003 |
2004 |
2005 |
2006 |
2007 |
2007 |
2008 | |||
Net sales |
$60.90 |
$68.62 |
$83.96 |
$93.75 |
$93.60 |
$45.19 |
$56.46 | ||
Gross profit |
$10.72 |
$13.97 |
$14.60 |
$19.24 |
$22.81 |
$10.38 |
$14.52 | ||
Gross margin % |
17.6% |
20.4% |
17.4% |
20.5% |
24.4% |
23.0% |
25.7% | ||
Operating income |
($1.51) |
$2.14 |
$2.17 |
$5.05 |
$7.25 |
$2.71 |
$4.61 | ||
Net income |
($1.52) |
$0.87 |
$0.66 |
$2.52 |
$4.16 |
$1.50 |
$2.72 | ||
Diluted EPS |
($0.34) |
$0.17 |
$0.14 |
$0.45 |
$0.71 |
$0.26 |
$0.44 | ||
Weighted shares outstanding |
4.49 |
5.00 |
5.26 |
5.57 |
5.86 |
5.79 |
6.25 |
Quarterly Financial Results | |||||||||
9/30/2006 | 12/31/2006 | 3/31/2007 | 6/30/2007 | 9/30/2007 | 12/31/2007 | 3/31/2008 | 6/30/2008 | ||
Net sales | $21.74 | $23.34 | $22.01 | $23.18 | $22.94 | $25.46 | $28.01 | $28.46 | |
Gross profit | $4.18 | $4.89 | $4.60 | $5.78 | $5.30 | $7.12 | $6.89 | $7.63 | |
Gross margin % | 19.20% | 21.00% | 20.90% | 24.90% | 23.10% | 28.00% | 24.60% | 26.80% | |
Operating income | $0.88 | $1.53 | $0.99 | $1.73 | $1.55 | $2.98 | $1.97 | $2.64 | |
Net income | $0.40 | $0.85 | $0.52 | $0.98 | $0.88 | $1.78 | $1.15 | $1.57 | |
Diluted EPS | $0.07 | $0.15 | $0.09 | $0.17 | $0.15 | $0.30 | $0.19 | $0.25 | |
Wtd shs o/s | 5.72 | 5.72 | 5.75 | 5.86 | 5.91 | 5.93 | 6.09 | 6.39 |
Segment Financial Results | ||||||||||
6mos | 6mos | |||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||
Net sales | ||||||||||
Component products | $31.30 | $36.10 | $48.20 | $55.80 | $53.80 | $26.80 | $32.90 | |||
Engineered packaging | $29.60 | $32.50 | $35.70 | $38.00 | $39.80 | $18.40 | $23.60 | |||
Total | $60.90 | $68.60 | $84.00 | $93.80 | $93.60 | $45.20 | $56.50 | |||
Operating income | ||||||||||
Component products | ($0.50) | $1.00 | ($0.60) | $2.80 | $4.80 | |||||
Engineered packaging | ($1.10) | $1.20 | $2.80 | $2.20 | $2.50 | |||||
Total | ($1.50) | $2.10 | $2.20 | $5.10 | $7.30 | |||||
Net income | ||||||||||
Component products | $1.20 | $1.40 | ||||||||
Engineered packaging | $0.30 | $1.30 | ||||||||
Total | $1.50 | $2.70 | ||||||||
Major Shareholders | ||||||||||
Bailly, Jeffrey | 676,000 | 12.60% | ||||||||
Estate of William Shaw | 334,000 | 6.20% | ||||||||
Advisory Research | 302,000 | 5.60% | ||||||||
California Public | 227,000 | 4.20% | ||||||||
Bjurman, Barry & Co | 226,000 | 4.20% | ||||||||
Lataille, Ron | 173,000 | 3.20% |
show sort by |
Are you sure you want to close this position UFP Technologies?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea UFP Technologies for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".