Span-America Medical Systems Inc.(NASDAQ:SPAN) manufactures and markets a comprehensive selection of pressure management products for the medical market, including Geo-Matt, PressureGuard, Geo-Mattress, Custom Care, Span+Aids, Isch-Dish, Risk Manager and Selan products. It also supplies custom foam and packaging products to the consumer and industrial markets. Through its wholly owned subsidiary Span Medical Products Canada Inc., SPAN manufactures and markets the M.C. Healthcare Products brands of Maxxum, Advantage and Rexx bed frames as well as related case goods, tables and seating products for the long-term care market.
SPAN's therapeutic support surfaces and consumer bedding represented 41% and 28% of SPAN's 2011 sales respectively. SPAN entered the replacement mattress segment of the medical market in 1992 by acquiring certain assets of Healthflex, Inc., including its PressureGuard II therapeutic support surface. Since then, SPAN has significantly expanded the PressureGuard product line and has added the Geo-Mattress product line to provide a broad line of therapeutic support surfaces. SPAN introduced its new Custom Care product line, its first therapeutic support surfaces designed specifically for the acute care market, in the first quarter of fiscal 2011. Consumer bedding products consists primarily of convoluted and contour-cut mattress overlays and specially designed pillows for the consumer bedding market, which are marketed to retailers through Louisville Bedding Company, a leading manufacturer and distributor of bedding products in North America.
SPAN is currently trading at a trailing 12 months P/E of 10.69 and a trailing 12 months EV/EBITDA of 6.05. Current P/B valuations at 1.84x represent a 5% premium over its five-year average P/B of 1.75x. SPAN achieved a ROE of 19.2% for the trailing 12 months and a five-year average ROE of 21.9%.
Financial and Business Risks
SPAN is debt free with cash and cash equivalents of $2.7 million representing 4.8% of its current market capitalization of $55.5 million. This does not include off-balance sheet liabilities such as purchase obligations and deferred compensation amounting to $3.6 million and $1.05 million, respectively.
In fiscal 2011, approximately 83% of SPAN's total custom products sales were distributed through Louisville Bedding Company. The loss of this relationship could have a material adverse effect on SPAN's business. Also, many of its medical products are sold through large national distributors in the U.S. and Canada, with Cardinal Health and McKesson Medical-Surgical, each accounting for 14% of sales in the medical segment in fiscal year 2011. Medical products are supplied to them based on purchase orders issued on a daily or weekly basis and these supplier-customer relationships can generally be ended by either party with minimal notice.
Sales of support surfaces represented 41% of SPAN's net sales in fiscal 2011 and these products are generally considered to be capital purchase items instead of consumable supplies. The discretionary nature of such purchases are more easily deferred during weak economic conditions.
SPAN is facing competition from low-cost foreign imports, particularly its consumer bedding product lines because those products have more commodity-like characteristics. In addition, national retailers are more likely substitute SPAN's products in favor of lower-cost products.
Business Quality and Capital Allocation
Span-America is one of the largest nationwide suppliers of therapeutic mattress overlays and patient positioners to the U.S. health care market. SPAN holds 24 United States patents and 4 foreign patents relating to various components of its patient positioners, mattress overlays, and therapeutic support surfaces for the medical segment. Its principal patents include the patents on Geo-Matt, Geo-Mattress, PressureGuard, and Span-Aids products. The Geo-Mattand Geo-Mattress patents have remaining lives ranging from 1 to 2 years with additional patents pending. The PressureGuard patents have remaining lives ranging from 3 to 10 years with additional patents pending. The Span-Aids patents have remaining lives ranging from less than a year to 4 years.
On Dec. 9, 2011, SPAN acquired the assets of M.C. Healthcare Products Inc., located in Beamsville, Ontario, Canada. M.C. Healthcare's complementary product lines fit very well within SPAN's existing medical sales and distribution channels, and offers it a new set of manufacturing skills and competencies.Combining M.C. Healthcare with Span-America also allows it to leverage M.C. Healthcare’s well-designed, solidly built bed frames and furniture with SPAN’s world-class line of therapeutic support surfaces. This combination will bring a new, one-stop option to its customers.
SPAN has paid dividends in every single year since 1989 and currently sports a dividend yield of 2.6% with a corresponding dividend payout ratio of 26%. On Nov. 8, 2012, SPAN announced that its board of directors declared a special cash dividend of $1.00 per share and a regular quarterly cash dividend of $0.125 per share. This regular quarterly dividend payment is SPAN's 92nd consecutive quarterly dividend and also represents a 13.6% increase in the cash dividend compared with the same quarter last year.
SPAN is attractively valued at 10x P/E with an average ROE of 20%. A 2.6% dividend yield, albeit low, is the icing on the cake.
The author does not have a position in any of the stocks mentioned.
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