Span America SPAN
December 09, 2006 - 11:12pm EST by
2006 2007
Price: 13.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 39 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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For those in need of an idea to berate, here’s a nice little ditty for you to have at.
Span-America Medical Products (SPAN) manufactures and distributes a range of foam based therapeutic mattresses, seating products, patient petitioners and “custom” consumer and industrial products sold through distributors to health care facilities and, to a lesser extent, retail. The company also licenses and sells a line of skin care products used to relieve diaper rash and pressure ulcers.
Finally, the company recently developed and is in the process of marketing a product it calls Secure IV. According to the company Secure IV is one of the very few products on the market that protects healthcare workers from needle pricks and blood exposure. The Safety Catheter segment, which includes the current modest sales of Secure IV, also includes licensed sales of complementary infusion related products. This business currently contributes little but a recent agreement with one of the largest healthcare contracting companies, Novation, is cause for some optimism. Novation has a large network of hospitals at the other end of its spigot for whom it offers volume purchasing discounts.
Span-America is a relatively small company, having produced on a trailing twelve month basis revenues and net income of $51.6mm and $3.1mm respectively. There are approximately 2,771,924 diluted weighted average shares outstanding and, at today’s closing price of $13.90, the equity market capitalization is roughly $38.5 million. SPAN carries no debt and has $6.1mm in cash and securities ($2.20 per share) on its balance sheet. As a result of the above, SPAN trades at a P/E of 12.6x, a P/B of 1.6x, and an EV/EBITDA of 6.5x.You’re welcome to back out cash and the earnings on it to arrive at cash adjusted P/E multiple. Finally, SPAN pays an annual dividend of $0.24 and previously paid a $0.40 special dividend in 2004. The current yield is roughly 1.8%
SPAN is clearly a well capitalized, consistently profitable and relatively cheap stock. I think the stock goes higher as a result of a handful of business initiatives currently underway:
1)       Sales to WalMart. SPAN sold to Walmart through a distributor for the past number of years. Those sales gave a significant boost to revenue though these lower margin products pulled down operating margins a tad over the past few years. The previous contract was discontinued last year and, as a result, margins crept up as its more profitable medical products sales positively impacted mix.
During Q4 of 2006 SPAN began shipping a new mattress pad offering called Fusion to Walmart. This line will be offered under Walmart’s HomeTrends brand. We’ll begin to see the impact this product has on revenues and operating income beginning next year, but early indications are positive.
2)       Safety Catheter Segment Sales : The Novation agreement, though it contains no commitments with respect to volumes, buys SPAN broad exposure to hospitals and will hopefully will help the product line gain traction. Lots of dollars went into developing this product over the last few years. As a result R&D spending, which declined by 44% year over year 2006, will continue to be managed down as the product goes into scale production. During the 2003-2005 period safety catheter R&D represented a full 59% of total R&D spending. Hopefully this product line will bear fruit in 2007 and later but it’s hard to hazard a guess at how significant sales might become. Total segment sales for 2006 represented a whopping $120,000.
3)       Rationalized Manufacturing; SPAN owns a 13 acre site in Greenville, South Carolina on which sits its principal manufacturing facility and corporate offices. The manufacturing facility was expanded significantly in late 2005 enabling SPAN to shut a satellite manufacturing facility in California and relocate production to Greenville. Operating efficiencies and gross margins should improve as a result. Incidentally, the company reported that foam costs (the major raw material for its primary line of business) are lower in Greenville than in California.
4)       Share Repurchase: The company announced that it will acquire up to 100,000 shares in the market. While seemingly small, it represents almost 4% of outstanding shares. Combined with a dividend hike (from 4.5 cents to 6 cents quarterly), this speaks to management’s understanding of its role as a steward of shareholder capital.
5)       Increased Focus on Investor Relations: SPAN management, prodded by shareholders, actually got out and promoted the company to prospective shareholders. In my experience this is a very, very low key management team…one that focuses on underpromising and overdelivering. Its recent participation in a New York City investor conference is a big step forward in bringing visibility to a wonderful company.
SPAN doesn’t provide much in the way of earnings guidance but, as mentioned above, it has a number of positives in its favor going into 2007. This year was driven by its higher margin medical products segment. Growth here is expected to moderate off a strong pace (21%) in 2006.  Its custom products segment, which contains the Walmart business, declined in 2006 (-18%) but prospects are good in 2007 and forward due to the new Walmart offering. And safety catheter is a wildcard.
Operating margins should improve due to the expected high volume Walmart offering and a consolidation of manufacturing in Greenville. R&D should also decline further.
At the end of the day, a combination of per share earnings growth and multiple expansion portend for a very decent return over the coming years.


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