UFP Technologies: Growth By Innovation

By Will Ashworth | June 09, 2011 AAA

One of the best ways I know for finding good micro-cap stocks is to screen for high insider ownership, looking for those companies with at least 20%. One consumer goods business that meets this criterion is Massachusetts-based UFP Technologies (Nasdaq:UFPT), a manufacturer of interior protective packaging and component product solutions. In laymen's terms, they do really cool things with foam. CEO Jeffrey Bailly and the rest of the management team including the board own 25.1% of its outstanding shares. This matters because it represents commitment, something essential when growing a small business. Richard Bailly, Jeffrey's father, co-founded the company in 1963, a clear indication the business runs in the family. CEO since 1995, I believe the best is yet to come for Jeffrey Bailly and UFP Technologies. Here's why.
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Innovation
Innovate or die! The oft-used expression is forefront at UFP. A total of 46 engineering employees with an average of 12-years service at the company continually seek to produce the best designs, processes and materials possible to make its clients - many longstanding - delighted with the final product. With 28 active patents and more on the way, it's no wonder it's doubled sales in the past decade from $61 million in 2001 to $121 million in 2010. A direct result of this growth is excellent stock performance. In the past decade, its average total annual return was 25.4%, 2330 basis points higher than the S&P 500. Sure, there were bumps along the way, including four down years out of 10, but at the end of the day, this kind of performance can't be ignored and it's a perfect example of why investors shouldn't ignore micro-caps.

Acquisitions
In 2010, its revenue grew 22%, split almost evenly between organic growth and growth through acquisitions. It spent $3.75 million in 2009 to acquire $4.6 million worth of assets from three struggling companies, resulting in an $840,000 gain. It gets better. The acquired assets were all part of its higher-margin component products segment. In 2010, those assets generated $11.6 million in revenue and operating profits of $1.6 million, which is a 42.7% return on investment. It will have recouped its money in two years or less. With $17.9 million in net cash (cash less total debt), it has plenty of capital to pursue a growth strategy that wisely incorporates tuck-in and complementary acquisitions. If 2009 is any indication of how it integrates acquisitions, investors should expect more to follow.

UFP Technologies and Peers

Company EV/EBITDA
UFP Technologies (Nasdaq:UFPT) 4.86
West Pharmaceutical Services (NYSE:WST) 9.56
Graham Packaging (NYSE:GRM) 8.18
Graphic Packaging (NYSE:GPK) 7.52
Packaging Corp. of America (NYSE:PKG) 8.80

Latest Financials
Economies of scale are really starting to take hold at the company. In the first quarter, revenues grew by 9.8% to $31.5 million. That's good, if not spectacular, growth. Slow and steady is more than fine, especially when you consider it increased earnings per share by 46% to 32 cents from 23 cents year-over-year. How did they do it? It improved the gross margin and operating margin for the quarter by 190 basis points and 130 basis points year-over-year. Its operating margin for the entire 2010 was 11.9%. Expect it to be between 13 to 14% in 2011. If so, earnings per share should be $1.59, 16% higher than in 2010. Nice and steady.

Bottom Line
This is a perfect micro-cap in my opinion. It's not a one-hit wonder that'll flame out in six months. It's going to be here a decade from now, continuing to innovate and make money and likely with Jeffrey Bailly at the helm. What's not to like? (For related reading, also take a look at How To Evaluate A Micro-Cap Company.)

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