Utah Medical Products Appears Cheap, But Slow Growth Explains It

Utah Medical Products (UTMD), is cheap relative to its sector, but this is because of its relatively low growth rate. UTMD's recent Femcare acquisition may have destroyed value and synergies are taking longer than expected to come through. It may present a reasonable 3%+ yield opportunity within medical devices, but I would look for a decline to below $24 before adding any new money to the stock to provide a sufficient margin of safety.

Context
UTMD is a solid company in the medical devices sector focused on obstetrics, gynecology, neonatel and blood pressure monitoring. Prior to the Femcare acquisition, revenue was in slow decline, but bolstered by aggressive share repurchases and the company had no debt.

Femcare Acquisition
Then in March 2011, UTMD made a significant acquisition, buying Femcare for approximately $41M. 80% of Femcare's revenue comes from the Filshie Clip, which is a method for women to achieve sterlization. Research suggests the Filshie Clip is a strong product being more effective and more easily reversible than competiting products. Femcare was acquired at 2.5x sales vs. 1.2-2.9x for peer companies within medical devices, so perhaps it's slightly expensive. I am not aware of a precise earnings number for Femcare, but based on its contribution to UTMD in the first 9M post-acquisition that figure may be approximately 22x earnings, which is high relative to 5-25x for a selection of similar medical devices companies. Femcare does give UTMD a greater presence in the UK and Australia vs. its current U.S. base, but as management stated in its most recent earnings release "our progress in achieving some important operating synergies from the combination of the entities has been slower than expected "

Comps and Ratios
Because the Femcare deal closed in late March there should be another $4M of Femcare sales coming through in Q1 2012, which lowers the p/e slightly.

Here I compare UTMD with a few medical device companies that are similar in size (<$1B market cap).

Metric	UTMD (current)	UTMD+Femcare Q1 '12 (est)	CPTS	MMSI	ANGO
Sales growth (organic)	-0.5%*	n/a	-5%	15%	8%
P/E	14.7x	13.8x	5.2x	22.6x	48x
Yield	3.2%	3.2%	0%	0%	0%
P/B	2.6x	2.6x	2.7x	2.0x	0.8x

Source: Google finance and my analysis.
*UTMD's organic growth is estimated after backing out Femcare's estimated revenue contribution of $12M.

Recommendation
UTMD has been shareholder friendly historically, but the Femcare acquisition may have destroyed value and tarnished that reputation. Without an acceleration in organic growth or merger synergies UTMD appears fairly valued, to slightly expensive, based on its flat to declining growth rate. And there are currently no signs that will change. UTMD's 3.2% yield appears safe in the near term given the 47% payout ratio. UTMD is an unexciting hold for those looking for a reasonable yield in medical devices, but I would not add new money at a price above $24 (vs. $30 currently), because a 11x p/e (vs. 14x currently) is more appropriate for UTMD based on the historical growth rate of the company.

Disclosure: I am long UTMD.