Long-term investors such as fund managers prefer to invest in blue-chip companies as they tend to have strong and sustainable profit margins. These qualities can act as great benchmarks while selecting tomorrow's blue chips in the small-cap space. SurModics Inc. (NASDAQ: SRDX) and Utah Medical Products Inc. (NASDAQ: UTMD) are companies with strong margins and growing top lines.
Minnesota based SurModics is a healthcare company that offers surface modification coating technologies, component products and technologies for diagnostic immunoassay, molecular tests and biomedical research applications. Since the company operates in a niche business area, it boasts of strong gross, operating and net margins. Over the last four quarters, the company has sustained operating and net profit margins in excess of 30 percent. The company's top line is not growing as fast as SurModics operates in a market niche; however, this shortcoming is more than compensated by solid margins.
The company has no interest bearing debt on its balance sheet and although the forward earnings ratio of 22 may not look very attractive, this is the cost of locking in solid margins. Earlier this year, analysts at Laidlaw initiated coverage on the stock with a 'buy' rating and a target price of $30 per share. This indicates more than 40 percent potential upside from current levels.
Utah Medical Products, a manufacturer of disposable medical devices for hospital use, is another company in the small-cap segment that enjoys high margins. During the latest three months ended March 2014, the company reported operating income of $3.8 million on sales of $9.8 million, translating into an operating margin of 39.1 percent. With a net income of $2.7 million, net margin of the company also sat comfortably at 27.7 percent.
Like most other high margin companies, Utah Medical Products also does not have a debt heavy capital structure. Although the company has largely experienced robust top line growth in recent years, growing revenues from $25 million in 2010 to $40.5 million in 2013, its latest quarterly results had lower sales as a result of centralized procurement under Obamacare and focus on reducing utilization of specialized devices in U.S. hospitals. Although these events are likely to bottom out this year, the subsequent drop in share prices offers a good entry point for long-term. Shares of Utah Medical Products are trading at their 52-week low levels, valuing forward earnings 16 times. It is noteworthy that the stock also offers a small dividend yield of 2.1 percent.