The past six months have been a windfall for UFP Technologies’s shareholders. The company’s stock price has jumped 41.9%, hitting $289.13 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why is UFP Technologies not exciting?
Despite the momentum, we don’t have much confidence in UFP Technologies. Here are two reasons why there are better opportunities than UFPT, plus one stock we’d rather own.
1. Fewer distribution channels limit its ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $631.6 million in revenue over the past 12 months, UFP Technologies is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Adjusted operating margin in limbo
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, UFP Technologies’s adjusted operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 16.9%.
Final judgment
UFP Technologies isn’t a terrible business, but it doesn’t pass our bar. Following the recent rally, the stock trades at 26.8× forward P/E (or $289.13 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks we would buy instead of UFP Technologies
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