Utah Medical Products: A Micro-Cap Case of Superior Capital Allocation

Small size but large return

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Feb 27, 2020
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Utah-based Utah Medical Products (

UTMD, Financial) develops, manufactures and markets a broad spectrum of disposable and reusable specialty medical devices, primarily focusing on products for women and newborns.

With a total staff of less than 200, the $350 million market-cap business has a global presence in more than 100 countries. As of fiscal 2018, the domestic and international markets each accounted for nearly half of the company’s total sales. Per the latest filings, individual insiders own, in aggregate, almost 7% of the company, which is a positive sign of the alignment of interests between the management and shareholders.

One thing that we particularly like about Utah Medical is the management’s superior capital allocation. As described below, the business consistently generated high returns on invested capital for more than two decades now. It also outperformed two industry giants, Becton Dickinson (

BDX, Financial) and Baxter International (BAX, Financial), in this regard most of the time (see below).


As we have always stressed, small size can produce large returns. However, this cannot be achieved without a niche focus on core competencies and prudent decision-making regarding capital deployment.

Utah Medical looks to invest mostly in clinical areas where it dominates (or can dominate) the market. The company’s gross and net margins both beat their industry averages by a wide margin (67% vs. 47% and 31% vs. 17%, respectively). Furthermore, its products are rigidly regulated, adding to the protection of the super-normal return from competition.

The shareholder-oriented capital allocation at Utah Medical also applies to the matter of share repurchases. As indicated below, the company committed a sizable portion of cash to buy back its own shares when the valuation was attractive in 2008 during the Financial Crisis and in 2004 during a FDA lawsuit. This is the value-creation discipline that is simple to understand but seldom well-executed among Corporate America today.


Other than repurchasing shares, the company typically pays out 30%-40% of its yearly profit as dividends and keeps the remaining for redeployment. For the past few years, the assets have grown faster than annual revenue, mainly due to the piling-up cash. However, the return on invested capital, as displayed above, has always been above the 20% level. It appears to us that the management remained prudent while looking for an excellent reason to spend the cash. In five out of the last ten years, the business ‚Äúconsumed‚ÄĚ less than 1% of its yearly sales as capital expenditure.

Looking forward, Utah Medical Products possesses a multi-cylinder growth engine in our view. The management expects that the business will continue to benefit from favorable demographic trends. At the same time, it will be seeking both organic opportunities (e.g., geographic expansion, innovation) and acquisitions. We observe that the company usually spends between 1% and 1.5% of its annual revenue on research and development.

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 stock market. We do not own any security mentioned in the article.

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