UFP Technologies: Building a Strong Portfolio of Acquisitions

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 |  About: UFP Technologies, Inc. (UFPT)
by: Violent Capitalist

UFP Technologies (NASDAQ:UFPT) basically is a company that focuses on plastics and foam type products (think coatings, packaging, insulation, etc) that sells to a variety of end users. The day-to-day business itself is nothing exciting - but what is interesting is its ability to make solid acquisitions at attractive prices, which translates into an unusually high return on capital and growth. Usually acquisitive companies, especially those that look to diversify and/or buy their way into growth, tend to not do so well without taking excessive risks that include risks of overpaying, operational risks, need for leverage, etc.

If you follow the M&A markets at all, there is a lot of activity going on. And I surmise there are two ways to play it - I can buy into companies that I think will get bought out or I can look toward conservative managers that scout acquisition targets. In my opinion it's quite hard to find out what companies get bought out with certainty and it's a lot easier to find a company or manager that is able to make acquisitions on the cheap. UFP Tech may just be that company/manager.

In the company's favor at this conjecture, especially by focusing on distribution/manufacturing of commodity type products, is the ability to buy into companies at valuations of 5-8x EBITDA. That is phenomenal when we were just taking about valuations of 8-12x prior to the credit crunch. With interest rates low (despite UFP not taking a lot of debt), and what seems to be a healthy number of willing sellers, makes it a pretty attractive time to focus on M&A of distribution/manufacturing companies.

UFP Tech has grown steadily through the credit crisis, tightening up working capital during that period to raise cash for acquisitions that it made in 2009 - and it's all coming to fruition today. With low interest rates and government support, small businesses have begun turning the corner, if only even for the interim. For an acquisitive company, UFP Tech's financials are an acquirer's dream. You'd almost want to believe they would put themselves up for some strategic alternatives.

Market cap: $98mil
Cash: $22.5mil
Debt: $8mil
EV: $84mil
NI: $9mil
OCF: $12mil
Capex: $2mil
FCF: $10mil
ROIC: 30%

Albeit, these numbers looked better when I bought my initial position at $12. The ratios are still very attractive at a less than 8.5x EV/FCF ratio. Even if they don't deploy the cash into another acquisition, I figure that within five years they can grow FCF to about $13mil conservatively. You may want to analyze this company on an EBITDA multiple, but I'll just stick to what works for me. At 10x FCF, I figure they should be worth at least $130mil in five years, which equates to a price of $22.

In reality, I would project out its growth based on deploying another $15mil in an acquisition. The ROE on it should be close to 10-15%, figuring an increase in FCF of about $2mil. At that estimate, UFPT could be worth closer to $25 and possibly beyond that if the company should take advantage of some low interest rates to incur debt and make larger acquisitions.

  • Price Today: $14.50
  • Conservative Fair Value: $22
  • Strategy: No options here, so buy in lots and build a position over time

Disclosure: I am long UFPT.