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Urbem's 'Wonderful Business' Series: Atrion

Small markets can produce attractive returns

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Jan 28, 2020
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Texas-based Atrion Corporation (

ATRI, Financial) engages in developing and manufacturing products for niche markets, mainly in the health care and medical industry.

Despite being a small-cap stock (approximately $1.34 billion market cap as of Jan. 28th, 2020), the business owns a diversified portfolio of market-leading products in the respective niches, including soft contact lens disinfection cases, clamps for IV sets, cardiac surgery vacuum relief valves, minimally invasive surgical tapes and valves and inflation devices used in marine and aviation safety products. Notably, the company’s proprietary technology, MPS2 Myocardial Protection System, is the only system used in open-heart surgery that delivers to the heart essential fluids and medications, mixes critical drugs and controls temperature, pressure and other variables.

As of fiscal 2018, fluid delivery products accounted for 46% of the total sales, followed by 39% from cardiovascular and ophthalmic products combined. During the same period, the domestic market contributed to nearly 63% of the total sales.

One of the key benefits of investing in small-caps in general for minority shareholders is the relatively high stakes from insiders. For Atrion, individual insiders (including the CEO, Chairman and Directors) own approximately 22% of the company, per the latest filing.

Atrion has been a perfect example showing that small markets can produce attractive returns. The company focuses on niche markets that offer significant opportunities for product development, market penetration and revenue growth. At the same time, the management appears to have allocated capital wisely, emphasizing customer needs, profitability, productivity and research & development.

According to the chart below, Atrion has steadily improved its return on invested capital, from almost 0% in 1996 to over 25% for recent years, which compares favorably with medical device giants such as Medtronic (

MDT, Financial), Becton Dickinson (BDX, Financial) and Baxter International (BAX, Financial).


We believe that the superior return on capital may sustain well for the foreseeable future, thanks to the niche focus and reputation for high quality in a mission-critical, safety-conscious space. These factors build a competitive moat, which can be further widened by the company’s continuous R&D spending (a compounded annual increase of 5% for the past five years).

In a typical year, Atrion retains more than 70% of total earnings (after paying dividends) to fuel long-term growth. Continuous international expansion and production innovations could be the two legs to support healthy growth in shareholder value, as the management explicitly indicated preference for organic opportunities. Meanwhile, we think that an aging population adds a significant tailwind for the company.

Atrion has also initiated share buyback programs from time to time to return capital to owners. We observe that no shares have been repurchased since 2017, when the valuation started to rise sharply (see below).


Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We do not own any security mentioned in the article.

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