In MoneyShow's Top Picks 2018 report published at the start of the year, money manager Jim Fink chose Utah Medical Products (UTMD) as his favorite speculative stock for the year. Now up 39%, the editor of Velocity Trader updates his outlook.
Since I recommended Utah Medical in January, the women’s healthcare stock has outperformed the virtually-flat S&P 500 by an astounding 39 percentage points through July 5th. There are several explanations for this significant outperformance.
First, global demand for women’s healthcare services is very strong and forecast to stay that way; the estimated annual growth rate through 2025 is 6% thanks to women living longer lives and increased public awareness primarily in the high-growth Asia-Pacific region regarding women’s health issues.
As Warren Buffett has been quoted as saying, the best businesses to invest in are those that any fool can run because eventually a fool will run them. UTMD’s focus on women’s healthcare positions the company for growth from the get-go regardless of management, but the medical device market can be very competitive and having a strong capital allocator at the corporate helm is another important factor to success.
Fortunately, longtime CEO Kevin Cornwell was reappointed to the board of directors at the May 4th annual shareholders meeting.
In the proxy statement issued early in April prior to the shareholders meeting, the board recommended that Mr. Cornwell be reappointed because it “considers Mr. Cornwell’s decades of strategic and operational experience in the medical device industry and the Company’s many years of success and profitability under his guidance to be key reasons why he should continue as a member of the board.”
Unlike many CEOs who care more about building asset empires without regard to profitability, CEO Cornwall puts profitable growth at the top of his priority list. This profit focus has been crucial to UTMD’s success over the years, especially given that the company has a small-cap market capitalization and does not rely on a deep-pocketed corporate partner for financial help with marketing and distribution expenses.
Achieving profit-maximizing economies of scale through a U.S. acquisition remains a corporate goal, but Cornwell will not overpay and, while waiting for an attractively-valued acquisition to come along, he is finding other ways to boost profits internally.
In the company’s 2017 annual report released in early March, Cornwell’s “Letter from the President” provided a great current example of how the CEO has increased the company’s profits in the cutthroat medical device marketplace by cutting unnecessary costs and increasing efficiency.
Specifically, the company has eliminated the added costs of third-party distribution of its Filshie Clip contraceptive device in Canada and France and now distributes the device directly to healthcare end user facilities.
Even more exciting is the five-year plan to eliminate third-party distribution in the larger U.S. market, which Cornwell forecasts will save three times as much money as the Canada and France changeover did.
Interestingly, he characterizes this distribution changeover as a type of cost-free “acquisition” that generates additional free cash flow. I love how this guy thinks! Every corporate action is evaluated by its effect on the bottom line.
First-quarter financials were excellent, with revenues up a respectable 6.1% and earnings per share up a very impressive 15.1%, which was due partly to the more efficient direct-distribution model outside the U.S. and partly to the lower corporate tax rate in the U.S.
The company has a stock-buyback authorization, but CEO Cornwell will only buy back shares if he feels they are significantly undervalued.
No stock repurchases occurred during the first quarter of this year or last year, but keep in mind that the stock closed at $62.30 at the end of the first quarter in 2017 and has almost doubled since then despite no stock buybacks during 2017. In any event, the company’s buyback program provides support for the stock if it experiences any momentary downtrends.
After a 39% gain so far in 2018 through July 5th, UTMD stock is not as cheap as it was when I recommended it back in early January, but CEO Cornwell’s obsession with value creation and profitability assures me that the company will continue to find ways to grow earnings and the stock price over time.
Lazard Asset Management apparently agrees with me that the stock is attractive. In its Form 13-F filed with the SEC in May, the money manager reported the acquisition of a brand-new 3% ownership stake in UTMD during the first quarter amounting to 112,800 shares worth $11.7 million.
