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6:31 pm
January 7, 2012
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Jae Jun
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Post edited 10:35 am – January 7, 2012 by Jae Jun
UFP Technologies, Inc. designs and manufactures engineered packagingsolutions utilizing molded and fabricated foams, vacuum-formed plastics,and molded fiber. It also designs and manufactures engineered componentproducts using laminating, molding, and fabricating technologies. TheCompany’s products include foam, plastic, and fiber packaging solutions,and component products. UFPT serves manufacturing sectors, but targetsopportunities in the medical and scientific, automotive, aerospace anddefense, computer and electronics, industrial, and consumer markets. TheCompany’s packaging solutions are made primarily from polyethylene andpolyurethane foams, and a range of sheet plastics. Its componentproducts include automotive interior trim, athletic padding, industrialsafety belts, medical device components, air filtration,high-temperature insulation, abrasive nail files and other beauty aids,anti-fatigue mats, and shock-absorbing inserts used in athletic andleisure footwear.
Why is it Cheap?
- Small cap in a highly fragmented and boring industry.
- Thinly traded.
- Low share count.
- High insider ownership.
Management
- Steady share dilution through options
- Approved 25k shares to CEO under the 2003 incentive plan. (Why? What is the 2003 plan?)
- Strong insider ownership at 25%. CEo owns 14%. All directors own more than 1%. Very good. Acts in the interest of shareholders.
- CEO is also president and chairman of the board. Not much independence here. CEO could do what he wants.
- Total exec compensation is 2.5%. Below my 3% maximum.
- CEO has held position since 1995. Been with the company since 1988 and worked his way up. Impressive. Very familiar with business.
- No open market buys. Mostly selling betwen $14 – $17.
Growth
- organic growth + acquisition growth
- The only way to really grow is to get more contracts. To do this, they need customers or contacts. The easiest way to do this in highly fragmented industries is to acquire other companies and consolidate it.
Strategic Advantage/Moat
- Requires indepth knowledge of customer requirements as many orders are customized. Not hard for customers to create new relationships, but not easy too. (switching effect)
- Designs own packaging equipment for better efficiency instead of buying off the shelf machinery.
- Not a huge moat. Very competitive industry.
- Offers high quality at a fair price. Not the lowest cost provider.
- Relies on trade secrets, continues development of new products to maintain competitive advantage. Product life cycles are very short so R&D has to develop new and better products each time to be ahead.
Competitors
- Highly fragmented and competitive industry.
- Competes with many other smaller package producers using different material.
Risks
- Regulartory risk to meet environmental standards and to get greener which is always more expensive.
- Top 10 customers make up 31% of sales.
- A single customer accounted for 14% of sales.
- Requires growth through acquisitions. If management is not good, then these acquisitions will be overpaid with a good chance it may not work out.
- Pricing of product is strongly dependent on raw materials.
- If customers move their manufacturing overseas, e.g. China, then UFPT will lose business.
Valuation
- Owns 26.32% of United Development Company Limited (UDT), a realty limited partnership but recognizes 100% of the revenue and balance sheet. In reality even if UFPT is it's only customer, only 26.32% should be recognized.
- Inventory shows a big increase in work in process. Raw materials has increased a bit with finished goods about the same. Seems like UFPT is getting ready for a big order.
- Off balance sheet liabilities are quite high starting in 2012. in 2012: $2.5m 2013: $1.76m 2014: $1.4m 2015+: $5m
- Company really has seen a turnaround since 2005. Acquistions have been really adding value. Increase in margins, and overall better numbers.
- Even with all those acquisitions, goodwill hasn't increased. Intangible assets hasn't increased. Management looks to be buying companies at a cheap price.
- Balance sheet is fantastic. Just remember to include the off balance sheet liabilties.
- Reverse DCF with $9m with 12% discount rate implies 0% growth. $7m FCF with 12% discount rate implies growth rate of 4.5%.
- Using my new accrual method, stock could be worth around $23.
- Reverse Graham with TTM EPS of $1.50 implies EPS growth rate of 3.5%. Considerably undermining the company in my opinion.
- EPV shows it to be about $22 + cash = $26
- Range of valuation looks to be consistently around $23 ~ $26
- CROIC since 2005 is 15%
- FCF/sales in past 2 years is 7.7%
- ROE has now increased to 18%
Catalysts
- continued acquisitions leading to higher EPS
- If an analysts starts following it, then it will rocket up due to the low float.
- But overall nothing exciting. Just a boring business.
Conclusion
Most companies that grow through acquisitions fail after several years. However, the biggest surprise is that management seems to buy the companies below what they are worth. Recent acquisitions hasn't added to goodwill and they are adding tremendous tangible book value, earnings and cash flow. Pre 2006, the company was horrible but since then, a remarkable turnaround has occured.
Compared to a company like TKR which also grows through acquisitions, there is close to no growth expected from UFPT.
Seems like the market hasn't caught on yet.
Verdict
- Management: A
- Growth: C
- Moat: B
- Risk: B
- Valuation: A
- Overall: A-
I was a fool to have been dwiddling my thumbs at $9 when I first saw it.
Other Links
http://seekingalpha.com/articl…..-packaging
http://seekingalpha.com/articl…..s-been-hit
http://seekingalpha.com/articl…..ood-growth
http://seekingalpha.com/articl…..quisitions
http://seekingalpha.com/articl…..-cash-flow
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3:18 pm
February 2, 2012
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Graeme
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I don't think I understand the vehemence over whether Jae, or anyone for that matter, is a "results" orientated investor vs a "process" orientated investor. I suspect it is a false dichotomy much like a "growth" vs "value" label. Analyzing results is as much a part of perfecting process as implementing a good process is to achieving results. An investing process does not just drop from the sky; it's built, qualified and adjusted. And the main metric for measuring the effectiveness of a process is the result of that process.
I'd argue that coming to a good answer to "knowing what I knew, why didn't I buy at $9" is one of the most important ones investors can answer for themselves in order to perfect their own process.
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11:12 pm
January 14, 2012
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m.adetokunbo
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If you don't understand the difference between focusing on process vs focusing on outcome I can't help you. Really, I can't. It's definitely a big blind spot you've got and frankly I'm surprised you don't seem to have really even thought about it. I'm not here to argue, do what you want.
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10:22 pm
January 11, 2012
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Jae Jun
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I think I know what you are trying to say, but you're argument is getting way off track.
Tell me that you've never sold for a profit and said "glad the outcome turned out as I hoped". If you never think about the probabilties/outcomes of an event unfolding, then how exactly are you investing?
By your argument, buying a cheap company and selling it at your expected value is outcome investing.
Having a good process does affect the outcome, but you're making it sound as if it should never matter.
Since you picked VVTV, do you remember that I was down 50% at one point? If you are down 50%, do you check up to see whether material news is going to affect your thesis or do you just close your eyes and hope for the best?
You can jeer at me all you want but even with CCME, IF it didn't turn out to be a fraud, then what's the rational or outcome? See the fine line you are arguing on?
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7:52 pm
January 11, 2012
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m.adetokunbo
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If you lose money and don't question whether you did anything wrong, then that itself is results orientated thinking and rationalizing. Same with if you make money and don't question why you made money.
No it's not! Not at all! Results-oriented thinking is where you're focusing on the outcome rather than the process. Of course we all make mistakes and trying to figure out what they are is important but I've seen you do this over and over and over. I've been reading your blog since VVTV and you're one of the most results-oriented guys I've seen probably ever. "Made a ton of money, I'm smart!" "Lost money, what am I doing wrong?!?!" The assumption that since you lost money or didn't make money you must have made a mistake is a very dangerous assumption to make. Sometimes your mistakes are obvious but you don't have to look hard for those ('CCME is audited by Deloitte so they can't be a fraud!' Well, lesson learned.)
Over the course of years and years of course results do become meaningful. But in the context of a single stock or a single quarter or even a year they just aren't worth paying attention to.
Now if I lost money purely by bad luck, then I'll brush it off and walk away. If I made a dumb move, then that part of the process has to be fixed.
Really, how can you tell the difference? Usually in the context of one stock unless it's super obvious (like the CCME thing) you really can't.
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12:51 am
January 11, 2012
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Jae Jun
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m.adetokunbo said:
Man you have got to cool it with the results-oriented thinking. Good investing is about process, not outcome. Over the years I've seen you post stuff like that over and over "Well it lost money what did I do wrong" or here "I was a fool to sit here twiddling my thumbs when it was at $9."
Unless you can identify some specific mistake you made it's not helpful at all. And often even if you do identify something you think was a mistake it is not helpful or useful- you're just rationalizing and making up a narrative with the benefit of hindsight.
Reader for years. I guess I got to be thankful that you've stuck around that long so I'll take your criticism with a good heart.
But I'm not rationalizing or making up a narrative.
e.g. "Well it lost money what did I do wrong"
If you lose money and don't question whether you did anything wrong, then that itself is results orientated thinking and rationalizing. Same with if you make money and don't question why you made money.
Now if I lost money purely by bad luck, then I'll brush it off and walk away. If I made a dumb move, then that part of the process has to be fixed.
Same with "I was a fool to sit here twiddling my thumbs when it was at $9". If I knew the company was solid then, why didn't I buy. That's the question I asked myself and the reason was that I was too complacent and didn't want to do further study. Had I continued, I probably would have gotten a better idea.
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6:19 pm
January 9, 2012
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m.adetokunbo
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Post edited 10:19 am – January 9, 2012 by m.adetokunbo
Man you have got to cool it with the results-oriented thinking. Good investing is about process, not outcome. Over the years I've seen you post stuff like that over and over "Well it lost money what did I do wrong" or here "I was a fool to sit here twiddling my thumbs when it was at $9."
Unless you can identify some specific mistake you made it's not helpful at all. And often even if you do identify something you think was a mistake it is not helpful or useful- you're just rationalizing and making up a narrative with the benefit of hindsight.
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8:15 am
March 17, 2011
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Jae Jun
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Yes the company is very attractive in my eyes.
Just not willing to pay fair value in this market to initiate a position, unless it is a very small position. Probably 2% max at these prices.
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1:37 pm
March 16, 2011
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stocki711
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http://biz.yahoo.com/e/110308/…..pt8-k.html
I thought this was an especially good move for the company. Assuming that the stock traded around $10 last year, Mr. Bailey received 30,000 shares as opposed to approximately 18,750 shares he would receive today ($16 share price). This deal raises his minimum base salary $50,000 but saves nearly $200,000 for a net gain of $150,000 a year with a share price above $16. This is another move by UFPT that makes me like them for long term. Including the 3 aquisitions they made during the market drop of 2009 (including one in March 2009) that have already lowered average cost of goods produced and increased revenues.
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10:52 am
March 2, 2011
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Jae Jun
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I dont want to add at these prices. Would like to see it drop to at least $15 and lower.
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9:29 am
March 1, 2011
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stocki711
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UFPT reported record earnings ahead of time while generating 11M in FCF for the year. $24M in cash and they have come down quite a bit recently from a $21.59 high ($17 presently). I think anywhere around here is good value with a balance sheet like BOLT.
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12:41 pm
December 7, 2010
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Jae Jun
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I can't give away everything so easily :)
but this is a small list of what I deem to be excellent prospects.
KIRK, YNGFF, RHDGF, SUNH, SBRA, HHC
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12:19 am
December 7, 2010
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Collin
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i agree. The numbers are impressive after 2005. will be investigating deeper.
Side note. mind sharing your buy list?
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5:36 pm
December 6, 2010
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Jae Jun
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I'm really liking this company. They make those cardboard molded packaging inside boxes for things like electronics.
Search for UFP molded products and you'll see what I mean immediately.
THe company has had a major turnaround since 2005 and the business has been booming.
Ran the numbers and it is incredible.
A risk is that one major customer accounts for more than 30% of sales.
FCF growth is considered 0% if you count the past 10 years, but if you only count the FCF from the past 5 years,
Ignore changes in working capital in the owner earnings formula and you get a much clearer idea of cash growth
FCF growth fluctuates but if you look deeper into the numbers, it is very good.
FCF growth is 0% while Owner earnings growth is about 30%.
In this case owner earnings is the one to use.
Croic is in the 14% range
FCF/sales = 4.6%
thin margins but it has been increasing. UFPT operates in a tough and competitive industry
Lots of other things to look at but so far, the company is worth around $14 – $15.
Wont be buying but I'll be adding this one to my buy list for the future.
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