Neogen Corporation: Living clean
Some things are in the kitchen with Dinah, and they’re scary. A mycotoxin here, bacteria there, listeria, salmonella, and is that E. Coli playing around with the frying pan? Not to worry. Neogen Corporation (Nasdaq: NEOG) has test kits to smoke out everything from sulfites in shrimp to allergens in almonds.
Nothing stirs Neogen’s sales like contamination concerns and a few food recalls. Fiscal 2008 second-quarter revenue, released earlier this month, rose 23% to $27.2 million from the same period in fiscal 2007, with the food safety division up 24% to $14.5 million and animal safety up 21% to $12.7 million.
Sales of AccuPoint and related accessories, used to test food preparation surfaces, grew almost 20% in the second quarter through November. Sales of Soleris, an optical system used to detect microbial contamination, grew more than 40%. Soleris is used to uncover poor food quality and spoilage. And revenue from tests for microorganisms, such as E. Coli and friends, and demand to detect mycotoxins, which occur naturally in field crops such as corn, also grew.
Clean living makes for happier, healthier animals, too. Neogen’s animal safety division markets a line of diagnostics, veterinary instruments and drugs, nutritional supplements, disinfectants and rodenticides. Reducing stress on food animals such as cows by killing off pathogens and rodent barn mates, and improving the methods of administering vaccines and drugs, have a big impact on the safety and quality of meat and milk.
Sales of veterinary instruments and products rose 55% in the second quarter, while life sciences and vaccine sales dropped 10% on order timing issues and rodenticide sales were down 4% because of mild U.S. weather.
With a revenue boost from nearly each sales category, earnings for the 25-year-old Lansing, Mich.-based company rose 34% to $0.22 per share in the second quarter from a year-ago. Net income in the second quarter was a record — the 59th consecutive profitable quarter from operations for Neogen.
Keeping food contamination in check is an expansive industry, both in the United States and elsewhere. Analysts project the market will reach $600 million, in part on increased corporate liability concerns and escalating government regulations that will affect food producers globally. USDA in a 2005 report said about 76 million people in the United States become ill from pathogens in food each year.
The company says its rapid, easy-to-use and inexpensive test kits position it to take advantage of the growing demand for both food safety and animal safety products. Neogen’s annual sales of tests for natural toxins, allergens and drug residues rose 51% in fiscal 2007 from 2006, which matched a 51% increase in 2006 from 2005. Sales of bacterial and sanitation products increased 31% in fiscal 2007. Sales in the third category in food safety — culture media — were up 5%.
Cows are fair game, with Neogen’s dairy antibiotic testing product called Beta Star awaiting approval from the U.S. Food and Drug Administration for sale in the United States. Beta Star tests raw milk for antibiotic residues. Neogen says Beta Star is selling very well outside of the United States and is looking for FDA approval in the second half of the current fiscal year. Revenue is likely to gain once this product is approved.
Neogen doesn’t stop there. It also sells global test kits to detect drugs of abuse in racing animals — including horses, greyhounds and camels — and also tests fair animals for drug residues. And, for those with opposable thumbs, test kits are used for human forensic toxicology drug screening, seeking out narcotics, stimulants, steroids and diuretics, to name a few key substances.
“Operating trends for Neogen remain very positive,” says analyst Anton Brenner at Roth Capital Partners. Brenner wrote on Jan. 4, after second-quarter results, that the company continues to post strong sales gains and year-over-year margin improvement; he looks forward to further margin improvement during the next several quarters.
Brenner raised his full-year fiscal 2008 revenue estimate to $101.7 million from $100.6 million and his earnings per share estimate to $0.81 from $0.80. For 2009, Brenner left his earnings estimate unchanged for fiscal 2009 at $0.95 — a 19% increase from expectations for 2008. He carries a “buy” rating on Neogen and has a $30 target.
Shares of Neogen paid investors handsomely in 2007, gaining nearly 80% to end the year at $26.55 — near its all-time high of $27.93 posted at the end of November. Shares closed Friday at $25.42, putting the P/E at 35. The company’s market capitalization is $365 million.
Neogen’s valuation may seem lofty, but Brenner carries a three-year earnings growth rate of 20%, spurred by increasing global food safety awareness and regulation. Acquisitions also will continue to be an important part of Neogen’s long-term growth, he says, noting that the company has $10.2 million in cash and is debt free. It also has access to at least $10 million through a line of credit, which should put it in good position to move on accretive acquisitions.
Hilliard Lyons analyst Stephen O’Neil is less sanguine and gives Neogen a “neutral” rating. He says Neogen is positioned to grow by providing tests that address consumer concerns about food safety, and by supplying valuable diagnostic services in the equine business. He also notes that the pending approval of Beta Star in the United States could aid sales. Neogen deserves a premium because of its strong financial condition and expansion opportunities, but O’Neil says the company’s current valuation reflects these factors.
Risks to Neogen include its dependence on the agricultural and food production industries. Agriculture is cyclical, influenced by weather and changes in consumption patterns, and a downturn in this industry could hurt sales. Neogen also operates with relatively little backlog and has few long-term customer contracts, meaning quarterly results can fluctuate widely.
But next time you bet on the camels, eat a taco and have a mocha latte with lemon cake, think about Neogen (NEOG). It’s there to keep you and your investments from spoiling.
