Over the past six months, UFP Technologies’s shares (currently trading at $244.72) have posted a disappointing 8.2% loss, well below the S&P 500’s 7.7% gain. This may have investors wondering how to approach the situation.
Is now the time to buy UFP Technologies, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is UFP Technologies Not Exciting?
Even though the stock has become cheaper, we’re swiping left on UFP Technologies for now. 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 $608.9 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 16.8%.
Final Judgment
UFP Technologies isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 23.4× forward P/E (or $244.72 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of UFP Technologies
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