Who are they:
UFP is a custom packaging and component manufacturer. They make single use packaging and parts that are included in a wide variety of products. Padding that goes inside a helmet? UFP. Gaskets that go into cars? UFP. The stuff that keeps your electronics padded during shipping? UFP. Most importantly for the business, the single use medical device packaging is made by UFP. They actually have a wide variety of products that go into a variety of applications across all industries. It's a little hard to describe since they make so many different things, but their website has a lot of information.
The company is based in Newburyport, MA and has a market cap of $878 million. They currently have a 17% ROE and gross margins around 25%. They have a net cash position (more cash than debt).
Management
UFP has an experienced management team. The CEO, Jeffrey Bailly, has been in the position since 1995, and has also been chairman since 2006. Numerous other executives have been with the company for 15 years or more. Under their management, the stock has done very well. I would describe this as an experienced and proven management team.
Growth drivers and moat
I'd rate the company as having a narrow moat. Most of their designs are custom creations that meet the specifications laid out by their customer. Because of this, they are involved in the design process with their clients. As a result, it would be costly for their customers to seek out a new packaging manufacturer as they would need to completely restart their design process and establish a new relationship. Since packaging makes up a relatively small expense in the process, it isn't really cost effective to constantly change packaging providers. At the same time, it is not easy to break into the industry as there are high upfront costs and a lot technical know how to effectively compete in the industry. It is also an industry that requires a reputation for quality, since device makers want to not lose sleep over something like packaging.
The largest and fastest growing division of UFP is their medical packaging unit. It currently provides about 85% of revenue, and increasing. They are in the process of building new manufacturing facilities in Mexico and the Dominican Republic. This will help them lower production costs, and expand their products internationally.
UFP also has a history of bolt on acquisitions. The packaging industry has a lot of smaller players and there is a long runway should they wish to continue to utilize this strategy.
This strategy has resulted in a 5 year CAGR in the earnings of 13%. This includes 2020, which was a very bad year for medical devices.
Risks
Medical packaging is a zero failure industry. Failure of their products could potentially lead to financial liability, and harm to patients. UFP acknowledges this in their 10K. It is always an issue in this field, but so far UFP has not had major problems.
They also state customer concentration as a potential risk. As of last 10K, they get 34% of revenue from their top ten customers. However, no individual company makes up more than 10% of revenue. In my opinion, this is the nature of medical devices. There are a few big companies that dominate the market (JNJ, SYK, MDT, etc.) and lots of smaller players.
They do list other risks in the 10K, but those were the ones that jumped out at me as being particular to this company. I also question how long their growth story can continue. If they keep it going, this could have a long runway in a fractured market. If not, this could descend into mediocrity.
Final thoughts
This company and stock have had a phenomenal run, yet still have a market cap less than $1 billion. It is trading in line with its historic multiples, and in my opinion is fairly valued. I do not own shares in this company, but would potentially be interested. It has had an amazing rally in the last few months, and could potentially be due for a pullback.
For the first 9 months of this fiscal year (They report full year earnings in March) the company has already made $4.41/share(per the last 10Q). This puts them on track to earn $5.88-$6 per share this year, giving them a 18x multiple. That would be low for the company, and also low for a growing medical company.
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