UFPT Savvy Acquisitions & Making it Work


UFP Technologies (UFPT) creates custom packaging, component and product solutions for the following markets: medical, automotive, aerospace & defense, industrial, electronics and consumer. When you buy an electronic item, the foam or egg carton type cardboard protectors are the types of products UFPT makes.


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Jae Jun

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UFP Technologies (UFPT) creates custom packaging, component and product solutions for the following markets: medical, automotive, aerospace & defense, industrial, electronics and consumer.

When you buy an electronic item, the foam or egg carton type cardboard protectors are the types of products UFPT makes. Visit their website to see exactly what I am talking about.

Why is it Cheap?

  • Small cap in a highly fragmented and boring packaging industry
  • Thinly traded and low float
  • High insider ownership

Management

  • Steady share dilution through options
  • Approved 25k shares to CEO under the 2003 incentive 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 as the CEO has influence on the company as a whole.
  • Total exec compensation is 2.5%. Below my 3% maximum but still a little on the high side.
  • CEO has held position since 1995. Been with the company since 1988 and worked his way up. Very familiar with business.
  • No open market buys. Mostly selling between $14 – $17.

Growth

  • Growth has come from organic + acquisition growth
  • The only way to really grow is to get more contracts. To do this, they need customers. The easiest way to do this in a highly fragmented industry is to acquire other companies and consolidate it.

Strategic Advantage/Moat

  • Requires in-depth knowledge of customer requirements as many orders are specially engineered and customized.
  • It is not difficult for customers to leave UFPT and create new relationships with UFPT competitors.
  • Designs own packaging equipment for increased efficiency instead of buying off the shelf machinery.
  • Does not have a huge moat. Very competitive industry, but the fact that such a small company is highly specialized and able to move quickly and efficiently is going to help.
  • Offers high quality at a fair price. Not the lowest cost provider.
  • Relies on trade secrets and 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 constantly to be ahead.

Competitors

  • Highly fragmented and competitive industry.
  • Competes with many other smaller package producers using different material.

Risks

  • Regulatory risk to meet environmental standards and to become greener, which is always expensive.
  • Top 10 customers make up 31% of sales.
  • A single customer accounted for 14% of sales.
  • Requires growth through acquisitions. If management is unsavvy, then 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 or just outsource the packaging directly to China or other cheaper countries, then UFPT will lose business.

Valuation

  • UFPT 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 little with finished goods around 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. Acquisitions have really added value. There has been a significant increase in margins and overall, just better numbers.
  • Even with all those acquisitions, goodwill hasn’t increased. Intangible assets hasn’t increased. Management looks to be buying companies below book value.
  • Balance sheet is fantastic. Just remember to include the off balance sheet liabilities.
  • Reverse DCF with $9m and 12% discount rate implies 0% growth. $7m FCF with 12% discount rate implies growth rate of 4.5%.
  • Using the 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 below book value driving an increase in cash flow and EPS.
  • Analyst coverage will really move the stock price due to the low float.
  • Overall nothing dramatic or exciting. Just a boring business continuing to execute.

Verdict

  • Management: A
  • Growth: C
  • Moat: B
  • Risk: B
  • Valuation: A
  • Overall: A-

Conclusion

Most companies growing through acquisitions fail after several years. However, the biggest surprise is that management seems to buy companies below their book value.

Recent acquisitions have not 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 occurred.

Compared to a company like Timken (TKR) which also grows through acquisitions, there is close to no growth expected from UFPT.

Seems like the market hasn’t caught on yet.

Other Links

http://seekingalpha.com/article/33835-eye-on-ufp-technologies-consider-biodegradable-packaging

http://seekingalpha.com/article/192929-ufp-technologies-inflection-point-has-been-hit

http://seekingalpha.com/article/204111-ufp-technologies-sound-financial-management-results-in-good-growth

http://seekingalpha.com/article/245985-ufp-technologies-building-a-strong-portfolio-of-acquisitions

http://seekingalpha.com/article/261705-ufpt-a-small-cap-that-generates-giant-yields-on-free-cash-flow

Disclosure

Long UFPT

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