Top Picks 2018: Utah Medical Products (UTMD)

01/09/2018 5:00 am EST


James Fink

Editor, Jim Fink's Options for Income and Stocks to Watch

Utah Medical Products (UTMD) manufactures medical devices for women and babies that are predominantly proprietary, disposable and for hospital use, explains Jim Fink, editor of Velocity Trader.

Utah Medical has four business segments, with more than half of sales (53%) dominated by gynecology, including surgical contraception and urinary incontinence therapy. The other three lesser segments are blood pressure monitoring (21% of sales), neonatal critical care (15%), and obstetrics (11%).

Women’s health care is an especially lucrative segment. Women undergo more medical procedures than men, because they get pregnant and live longer.

The tailwind for health care stocks provided by the aging of America and increased government spending on health care services is so strong that there is no reason to believe that healthcare stocks like Utah Medical can’t continue to outperform other industrial sectors for the foreseeable future.

The one health care subsector that has slightly lagged is the medical device area because of fears concerning the 2.3% excise tax Obamacare levies on the gross sales of manufacturers of medical devices. The tax was suspended in 2016 and 2017 but will return in 2018 absent a new legislative waiver.

CEO Kevin Cornwell has been at the helm of Utah Medical for 25 years. He’s an honest straight shooter. The integrity of a corporate leader is one of the most important attributes of a successful business.

An important part of integrity is respect for the average shareholder. Financial performance has been stellar before and during Cornwell’s tenure as CEO, which began in 1992.

The stock’s annual return on equity has averaged 28% in the 31 years since the company turned profitable in 1986, only four years after it went public in 1982. Even over the more recent past, Utah Medical has exhibited tremendously consistent profitability.

A transformational acquisition occurred in 2011 when the company bought England-based Femcare Holdings Ltd., manufacturer of the Filshie Clip System for permanent female sterilization.

The acquisition was paid for with existing cash and low-cost debt. Earnings per share have grown every year since then. Six years after the acquisition, Utah Medical is debt free thanks to positive annual operating cash flow.

In October, the company increased its quarterly dividend for the 15th consecutive year. The stock has performed well in 2017, gaining more than 14%, but the p/e remains below its average peer, as well as the S&P 500. There’s plenty of room left for CEO Cornwell to steer the stock towards further capital appreciation.

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