Why UFP Technologies is a Hidden Gem in Medtech
(NASDAQ: UFPT)
UFP Technologies is a innovative custom manufacturer specializing in comprehensive solutions for medical devices, sterile packaging, and other specialized products. Essentially, the company collaborates with medical device manufacturers to create a variety of single-use devices and components tailored for the medtech industry.
The medical device market is thriving, currently valued at about $500 billion. Since 2000, UFP Technologies has achieved remarkable total returns exceeding 10,200%, which translates to being a 103-bagger in that time frame.
Given its impressive performance, I decided to invest in UFP early in 2023 when its price-to-earnings (P/E) ratio was just 22, even though the company had reported a sales growth of 91% in the third quarter of 2022.
Since my initial investment, UFP’s stock has more than doubled, despite experiencing a 19% drop from its peak in September. I remain optimistic about UFP’s long-term prospects, believing there are numerous reasons for its continued ascent.
In the following sections, I will explain why I plan to increase my investment in this successful company and hold onto my shares for the foreseeable future.
UFP’s Success in the Medtech Market
With over 60 years of experience in the medtech industry, UFP Technologies serves 26 of the 30 largest medical device manufacturers worldwide. These companies collaborate with UFP to develop solutions that meet specific needs.
The efficiency of UFP’s business model lies in its ability to evaluate manufacturers’ self-funded ideas for feasibility while leveraging its patents and exclusive material access. This allows UFP to selectively pursue higher-margin, single-use product ideas.
For example, UFP has a four-year, $500 million agreement with Intuitive Surgical, a leader in robotic-assisted surgery (RAS). Together, they created specialized “drapes” for robotic surgery, which help separate surgical instruments from the robot while maintaining flexibility. These drapes have become UFP’s largest revenue generator, accounting for nearly one-third of total sales, reflecting Intuitive Surgical’s consistent 13% sales growth over the past decade.
This long-standing partnership and UFP’s focus on approved product ideas have significantly enhanced its profit margins in recent years.
UFPT Operating and Profit Margin (TTM) data by YCharts
UFP’s improving margins have led to remarkable growth in its free cash flow (FCF) and net income, increasing 17-fold and 7-fold, respectively, since 2014. This robust profitability allows the company to invest significantly in growth initiatives, primarily through mergers and acquisitions (M&A).
Image source: Getty Images.
UFP’s Future Growth Potential
UFP’s growing profitability not only fuels M&A efforts, but it also indicates effective integration of past acquisitions. The company’s return on invested capital (ROIC) has risen from 8% during the pandemic to 15% today, suggesting that its eight post-pandemic acquisitions have started to yield positive results.
The strategy focuses on acquiring companies that add capabilities, geographic reach, new market sectors, or more materials. For instance, UFP’s acquisition of AJR Enterprises, which manufactures patient transfer devices, was particularly strategic. Although AJR only served Stryker as its customer, this relationship lowered the risk for UFP, as it already partners with Stryker for other products.
Furthermore, the acquisition of Marble Medical provided UFP with its first-ever distributorship with 3M, creating opportunities for new innovations in stick-to-skin and robotic drape applications. With access to unique materials, UFP strengthens its competitive barrier.
Facing challenges from potential competitors, UFP benefits from its exclusive partnerships, an extensive patent portfolio, and a lengthy history of customer relationships, making disruption unlikely in the near future.
Management anticipates sales growth of 12% to 18% over the next three to five years, an increase from the past decade’s 13% growth rate. These projections coupled with the medtech industry’s expected annual growth of 6% through 2032 reassure me in my decision to invest in UFP at a considerable 40 times its forward earnings.
In conclusion, UFP Technologies’ ability to enhance margins and expand through strategic acquisitions positions it as an investment opportunity not to be overlooked. I’m inclined to act now rather than wait for an elusive “ideal” price.
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Josh Kohn-Lindquist has positions in UFP Technologies. The Motley Fool has positions in and recommends Intuitive Surgical. The Motley Fool recommends 3M. For more information, please see the Motley Fool’s disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
