We came across a bearish thesis on UFP Technologies Inc. (NASDAQ:UFPT) on ValueInvestorsClub by Pop4Pres. In this article, we will summarize the bears’ thesis on UFPT. The company’s shares were trading at $306.00 when this thesis was published, vs. the closing price of $238.73 on Dec 31.
Close-up of a robotic endoluminal surgery device performing a procedure in an operating room.
UFP Technologies designs and manufactures solutions for medical devices, sterile packaging, and other highly engineered custom products. 90% of its business comes from manufacturing disposable medical supplies and the remaining 10% from engineered components for auto, aerospace & defense, industrials and other markets.
The biggest threat to UFPT is the revenue concentration from robotic drapes that it supplies to ISRG robots. UFPT has benefitted from an increase in the share supplied to ISRG due to a price hike by Medline, another supplier for ISRG. However, alternative arrangements from Microtek, like manufacturing in low-cost locations could reduce the final cost for ISRG. ISRG has also shown intent to in-source drapes in a bid to reduce input costs. While the in-sourcing may take time to realize, ISRG is looking at a price of low-teens per drape. This is a significant drop when compared to the existing market price which ranges from $40 to $160. It must be noted that UFPT is already suffering from one of the lowest gross margins in the industry. Being a price taker, it may have to reduce the selling price in order to maintain its share of business with ISRG.
Without the revenue from ISRG, the business is spiraling downward. Imports for Das Medical (a subsidiary that manufactures drapes in the Dominican Republic) in Jul-Aug have fallen by 66%. The MedTech business excluding ISRG posted negative growth rates in the last four quarters. The company has been pursuing M&A deals to scale up but this has only increased its debt levels.
The insourcing by ISRG and the resurgence of Medline could lead to a cut in UFPT’s EBITDA by 20% to $95 million. With a multiple of 17x, the implied share value would be $180, 25% lower than the current market price. The fact that the CEO and CFO have reduced their stake by almost 30% does not bode well for the stock.
While we acknowledge the potential of UFPT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than UFPT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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