UFP Applied sciences (NASDAQ: UFPT) has seen its share value develop by 12,040% over the past 25 years, making it a 121-bagger. Had traders held their shares all through that point, they might have turned a $10,000 funding into greater than $1.2 million.
Regardless of this unbelievable run, UFP’s multibagger story may nonetheless be in its early chapters — and the corporate is now out there to traders at a reduction following a latest 27% dip in share value.
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This is what this promising small-cap business does, together with the 4 primary causes I am shopping for shares of the inventory hand over fist in 2025.
1. UFP’s widening moat
UFP Applied sciences counts 26 of the 30 largest medical device makers as prospects. It designs and manufactures a large assortment of single-use elements and options for the medical expertise (medtech) business. Collaborating with its prospects, UFP creates merchandise like surgical drapes utilized in robotic surgical procedure, medical beds, sterile packaging, quite a few surgical elements and sub-assemblies, and surgical procedure ports and port cleaners.
Whereas the corporate is not dwelling to a single, particular moat that provides it a bonus over its friends, it has quite a few differentiators giving it a leg up on the competitors, together with:
- Unique entry to sure medical-grade supplies because of a number of manufacturing certifications
- Quite a few patents tied to its merchandise
- Excessive switching prices for patrons resulting from its collaborative course of and long-standing relationships
- A concentrate on boring however hard-to-disrupt and important product niches that do not appeal to intense competitors
- A mean tenure of over 30 years for its CEO, CFO, and president
Aided by these benefits, UFP Applied sciences has not solely delivered sturdy value appreciation, however can also be well-positioned to proceed succeeding sooner or later. Finest but for traders, the corporate’s largest product line — surgical drapes — is poised to proceed rising quickly because of a producing provide settlement with Intuitive Surgical.
2. Ties to Intuitive Surgical
In 2024, UFP signed a brand new four-year, $500 million settlement with Intuitive Surgical to provide the chief in robotic-assisted surgical procedures with single-use, sterile drapes that defend the robots throughout operations. This settlement ties the corporate to an business that analysts imagine will develop by at the least double-digits for years to return.
This surgical drapes product line at the moment accounts for roughly 27% of the corporate’s complete income and suits in completely with UFP’s concentrate on recurring, single-use, single-patient product gross sales.
With Intuitive Surgical just lately reporting earnings that noticed overall sales from robot installations grow by 25% within the fourth quarter, UFP’s most vital product line ought to profit and hold pushing the inventory’s prime line larger.
3. Rising margins create a flywheel impact
Whereas UFP’s 13% annualized gross sales development fee over the past decade is spectacular sufficient, the corporate has grown its web revenue by 26% every year over the identical time-frame. A lot of the explanation for this success has been UFP’s concentrate on choosing higher-margin merchandise to fabricate with its prospects.
Since its prospects sometimes generate product concepts and convey them to the corporate for a manufacturing feasibility test, UFP finally decides whether or not to proceed with manufacturing. This enterprise mannequin basically implies that the corporate will get to hand-select which concepts to pursue — sometimes higher-margin areas. This has led to the corporate’s vastly improved profitability.
UFPT Operating Margin and Profit Margin (TTM) information by YCharts
Powered by this ballooning profitability, UFP has begun to discover the mergers and acquisitions (M&A) market voraciously, including 4 corporations in the summertime of 2024 alone. Focusing on companies that shall be accretive to its backside line throughout the first yr of their buy (and complement or improve its present product traces), UFP has created a little bit of a flywheel impact over latest years.
Greater margins have enabled additional M&A over the past 5 years, and these acquisitions have generated larger earnings over the earlier two years, making a flywheel impact that would proceed for a few years to return. Whereas the corporate’s 2024 acquisitions have a whole lot of potential, traders will wish to watch UFP’s earnings studies intently this yr to verify the newly built-in enterprise traces dwell as much as administration’s M&A targets.
4. Premium development, now at a greater worth
Following the corporate’s 27% drop over the previous couple of months, UFP now trades at 29 occasions ahead earnings. This valuation compares favorably to the S&P 500‘s common forward price-to-earnings ratio of 24.
This comparability holds very true when you think about that UFP has grown its web revenue by 24% yearly over the past decade in comparison with the S&P 500’s common of seven%.
With tailwinds from the robotic-assisted surgical procedure business, a widening moat, and the potential for growing an M&A flywheel, UFP Applied sciences shall be a inventory I add to on the dip, though its value has already doubled since I first bought it.
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Josh Kohn-Lindquist has positions in Ufp Applied sciences. The Motley Idiot has positions in and recommends Intuitive Surgical. The Motley Idiot recommends Ufp Applied sciences. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.
