Investment Memo #1: Utah Medical Products, Inc. (NASDAQ: UTMD)
UTMD, headquartered in Utah, is a profitable medical devices company that makes critically important fetal monitoring accessories, vacuum-assisted delivery systems, and other labor and delivery tools.
Investment Summary:
Strong Balance Sheet with $82mm in cash and no debt
Long history of paying dividend
21 consecutive years of regular quarterly cash dividends and dividend growth (2 years negative growth rate, 2022 and 2011)
Current dividend yield of 1.97% ($1.22) per year.
Consistent track record of generating free cash flow for 30 consecutive years
Total FCF less CAPEX from 1996 through 2024 was $346.4 million (average of approximately $11.9 million per year), with no negative cash flow years.
Longtime key supplier to neonatal intensive care units, labor and delivery departments, women’s health centers in hospitals, outpatient clinics, and physicians’ offices
Diversified revenue sources across a diversified distribution network
Strong secular tailwinds in global neonatal care equipment and services market
Driven by increasing rates of preterm births, greater awareness of neonatal health, and technological advancements in equipment like incubators and monitoring systems.[1]
The global fetal and neonatal care equipment market size was estimated at USD 8.2 billion in 2022 and is expected to expand at a CAGR of 6.47% from 2023 to 2030. The growth of this market is attributed to factors such as high birth rates in developing countries, the prevalence of premature births, and government efforts to increase survival rates in such cases.1
International expansion
The North America market is the largest market in neonatal, with 39.3% of total market share in 20221
The market in Europe is expected to grow due to the increasing frequency of acquired infections among newborn babies and a growing number of hospitals and NICUs. In addition, a sizeable patient population suffering from low birth weight and an increasing number of preterm births are poised to surge the market growth in Europe.1
Asia Pacific is expected to see growth of 7.93%, as according to the WHO, over 60% of premature births occur in South Asia and Africa1
Strong product portfolio
The company sells products in labor and delivery, neonatal intensive care / pediatrics, women’s pelvic health & gynecology, urology, electrosurgery, blood pressure / blood management, OEM & contract manufacturing
Their biggest brands include:
Filshie® Clip System – a contraceptive device
One of the most important brands, making up 15-20% of domestic revenues
Liberty® Pelvic Floor Stimulation System – for treating urinary incontinence
Supra-Foley® – a suprapubic bladder catheter device
BT-Cath® – a uterine ballon tamponade catheter, used to manage postpartum hemorrhage
Loss of a key OEM client
PendoTECH accounted for a large share of UTMD’s OEM revenues—PendoTECH recently announced they are bringing in their manufacturing in-house, creating a decline in UTMDs sales
UTMD is more exposed to OEM risk – PendoTech account for roughly 22% of the segments revenues
Potential for an activist play
Stock price has under-performed in the last five years:
Compared to SPX being up 112% in the last 5 years, UTMD is down 23%.
From structure perspective, the staggered 5-member board has 3 classes with 3-year terms
The board has 4 male and 1 female members
Kevin L. Cornwell, who is 77 years old, has served as Chairman since 1996 and has been the CEO since 1992—making it 30 years since any change in leadership of the board or management
Ernst G. Hoyer, 87, is the lead independent director and has been on the board for 29 years since 1996
The average age of the board is 71 years old (with 2 above 80 and 1 member in their 60s).
UTMD board has a number of governance issues including:
A staggered board with three classes of directors each serving 3-year terms.
Carrie Leigh, 42, replaced the independent board member Dr. Barbara Payne who served 27 years—Carrie is the chairman’s daughter, voiding her from being truly independent.
The average length of time on the board of independent board members is 21-years (26 when removing the chairman’s daughter).
An activist may be able to add one or more people to the board, increase the stock price by bringing in fresh governance and insight—focusing on higher margin products with a sustainable advantage—and help with the international expansion to higher growth regions
Cash holdings are currently $82mm and the companies market cap is $198, 41% of the value is from cash on its balance sheet
Insider holdings are 7.13%; Brandes Investment Partners, LP—a value investment manager—recently bought a 10% stake but has indicated they do not intend to influence or control the company upon filing a 13G.
[1] Fetal And Neonatal Care Equipment Market Size, Share & Trends Analysis Report By Product (Fetal Care Equipment, Neonatal Care Equipment), By End-use, By Region, And Segment Forecasts, 2023 – 2030, Grand View Research Inc.