Atrion Corporation (ATRI) is a leading manufacturer of medical devices and components, Atrion makes a wide range of products for specific niche markets, primarily in the field of health care. Most of the company's products are supplied to the cardiovascular, ophthalmic and fluid delivery markets. ATRI's fluid delivery products, cardiovascular products, ophthalmic products accounted for 38%, 29% and 17% of 2011 sales, respectively.
ATRI is currently trading at a trailing 12 months P/E of 16.58 and a trailing 12 months EV/EBITDA of 8.66. Current P/E valuations represent a slight 4% discount to its five-year historical P/E of 17.2. ATRI achieved a ROE of 17.0% over the past 12 months and a five-year average ROE of 17.8%.
Financial and Business Risks
ATRI is debt free with cash and cash equivalents of $38.7 million representing 10% of its current market capitalization of $398 million. In 2005 and 2006, ATRI invested more than $31 million in new facilities and equipment that led to a moderate amount of debt in 2006, which was was fully repaid in 2007.
The principal raw materials that ATRI uses in its products are polyethylene, polypropylene and polyvinyl chlorideresins. The resins are derived from petroleum and natural gas, and the prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand and the capacity of the companies that produce these resins to meet market needs.
ATRI currently has more than 300 active patents and patent applications pending on products that are either being sold or are in development. It pays royalties to outside parties for four patents. Its patents expire at various times over the next 18 years.
In 2011, Novartis International AG was ATRI's only significant customer concentration risk, with sales of products to several divisions of Novartis accounting for approximately 13% of ATRI's net revenues.
Business Quality and Capital Allocation
Although ATRI is a relatively small company in the medical products arena, a number of its products hold leading market positions in their respective niches. For example, ATRI is a leading U.S. manufacturer of soft contact lens disinfection cases, clamps for IV sets, cardiac surgery vacuum relief valves, minimally invasive surgical tapes and check valves. It is also the leading manufacturer of valves and inflation devices used in marine and aviation safety products.
For 13 consecutive years from 1999 through 2011, ATRI produced EPS growth of more than 10% a year, ranging from 11% to more than 50%. It also delivered a five-year EPS CAGR of 18.40% and a 10-year EPS CAGR of 11.54%. Over the same 13-year period, ROE steadily increased from 5% in 1999 to 19% in 2011. This was achieved despite fluctuations in markets, product demand and the economy.
ATRI’s ability to generate strong cash flows is a key strength that enables ATRI to deliver consistent growth and profitability and to support ongoing R&D and capital improvements in technology, facilities and equipment. Except for 2005 and 2006 when ATRI invested heavily in a manufacturing facility in St. Petersburg, Fla., it has delivered positive free cash flow in 8 out of the past 10 years. Its consistent generation of cash flow also enables it to invest in value-creating initiatives such as stock repurchases and dividend payments.
ATRI has paid dividends in every single year since 2003 and currently sports a dividend yield of 1.1% with a dividend payout ratio of 17%. Dividends are paid quarterly. Since 2003, when ATRI initiated the payment of quarterly dividends, it has increased the dividend eight times. In August 2011, it boosted the quarterly dividend from 42 cents per share to 49 cents per share. On Nov. 13, 2012, ATRI announced that its board of directors has declared a special cash dividend of $10 per share on its outstanding common stock to be paid on Dec. 10, 2012. From 1999 to 2011, ATRI repurchased nearly 2 million shares of its common stock.
A 1% dividend yield is not significant in the investment decision. Valuations are fair, but not compelling for this free cash flow positive, niche manufacturer of medical devices.
The author does not have a position in any of the stocks mentioned.