Utah Medical Products Inc. (UTMD) may be trading up nearly 40% over the past 52 weeks, but the stock remains relatively undiscovered. The single-use specialty medical device manufacturer reported revenues that increased 10% and net income that jumped 35% during FY 2012, while offering a stable 2% dividend yield and trading at a modest 15x price-earnings ratio. But, the company faces many challenges ahead, including a new 2.3% U.S. medical device tax that will affect top and bottom line results in FY 2013 and beyond.
Solid Performance in FY 2012
Utah Medical Products reported a 10% increase in FY 2012 sales, due largely to its Femcare acquisition, which helped it diversify outside of the U.S. into the U.K. and Australia. While the company initially struggled realizing operating synergies, the improvement in gross margins last year suggest that many of these problems are being resolved. The revenues generated from the acquisition have also been used to pay down its sizeable debt faster than required, with over half of the $27 million price tag already repaid by the end of 2012.
On the bottom line, the company's gross profit improved due to a more favorable revenue mix, better manufacturing utilization, and better efficiencies in its molding operations. These improvements contributed to a 35% improvement in net income, which helped boost the share price over the past year by over 30%, since, assuming the same multiple, share price must increase when earnings per share increases. These profits could have also been even higher, but the company took a loss on exchange rates from a stronger dollar.
Favorable Multiple Vs. Comps
Utah Medical Products also trades at a discount relative to many other medical device companies with similar sub-$1 billion market capitalizations. With a modest 15.29x price-earnings multiple, the stock compares favorable to 20.56x average computed by Yahoo! Finance and some other companies listed in the table below. The stock appears somewhat overpriced when it comes to industry price-to-sales and price-to-book ratios, but some of this could be explained by a higher than average gross and operating margin that commands a premium.
*Data from Yahoo! Finance
Potential Hurdles Ahead
Utah Medical Products may have reported a 35% improvement to the bottom line, but maintaining a 15x price-earnings multiple will require more than 10% top line growth, if similar margin improvements can't be realized in FY 2013. Management hopes to extract growth from its Femcare acquisition and organically, but the new medical device tax could take a big piece of that pie in FY 2013 and beyond, particularly as it's a tax on revenues and not profits. These and other headwinds could prove difficult to management to overcome.
So, what does all this mean for shareholders and would-be investors? The company will be providing additional guidance on March 18th when it releases its 10-K filing, including management's projections for 2013. But, based on available information, much of the company's upside may already be priced in, unless management is able to further improve margins or surprise investors with some top line gains in FY 2013. However, the stock could become an interesting value play with a more reasonable 10x P/E multiple.