Sector Watch: Food safety
Over the past five years, the food-safety market has more than doubled in size to $1.6 billion and it's expected to grow at a 5.5% clip through 2010. The U.S. food safety testing market generates sales of about $600 million, while the worldwide market for animal safety products is estimated to exceed $14 billion annually.
Corporate liability concerns and government regulations affecting food producers are increasing spending on food safety testing. Food packaging companies face serious consequences if products become contaminated by harmful bacteria, toxins, unlabeled food allergens or other contaminants. A coalition of consumer and industry groups are pressing the Bush administration to double the U.S. Food and Drug Administration’s food safety budget, now about $450 million per year.
Two companies benefiting from increased food safety testing are Neogen Corporation (Nasdaq: NEOG) and Strategic Diagnostics Inc. (Nasdaq: SDIX).
Neogen through its subsidiaries, is a leading provider of food safety testing and animal health products. Neogen’s Food Safety segment develops and markets diagnostic test kits for detecting dangerous or unintended substances in human or animal food, including food-borne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, drug or pesticide residues or general sanitation concerns. The company’s animal safety segment produces and sells pharmaceuticals, rodenticides, disinfectants, vaccines, veterinary instruments, topical ointments and diagnostic kits. Neogen markets its products directly as well as through a network of national and international distributors and large farm supply retail chains. It operates in the United States, Latin America, Asia and Europe.
Neogen is differentiated from competitors by its broad product line, a significant advantage in a testing market that favors single-source suppliers. The company markets more than 200 diagnostic tests, supported by a comprehensive line of complementary services and around-the-clock technical support.
Neogen’s revenues grew 15% last year to $72.4 million and net income increased 34% to $7.9 million, or $0.92 per share, from $5.9 million, to $0.70 per share. In the first quarter of fiscal year 2008, Neogen’s revenues expanded 13% year-over-year to $22.9 million from $20.2 million and net income rose 25% to $3 million, or $0.21 per share, from $2.4 million, or $0.17 per share. This marked the company’s 58th consecutive quarter of operating profitability.
Sales of a histamine test for tuna packagers grew 20% following approval from an important third party verification lab. Sales of pathogen tests for detecting E. coli, samonella and listeria grew 16% year-over-year and sales of its acquired Soleris microbial detection system doubled year-over-year, reflecting expanded applications and international growth with international representing 40% of overall first quarter sales.
The August acquisition of Kane Enterprises, a leading animal safety products marketer with over 200 North American distributors, will add over $6 million to Neogen’s annualized revenues. Analysts expect Neogen to produce 20% growth in fiscal year 2008, 24% growth next year and long-term growth averaging 19% annually. My $32 target for these shares is above the recent stock price of $26.44. Over the last 52 weeks, shares have ranged between $13.83 and $27.93.
Strategic Diagnostics also participates in the food safety testing market. The company develops and markets enrichment media and rapid tests for detecting food pathogens and analyzing drinking water, industrial process water and wastewater and soil contamination tests for environmental remediation projects, hazardous waste operations and other applications. Strategic Diagnostics markets its products through direct sales, the Internet, and through distributors in North America, Latin America, Europe and Asia. In addition to food safety products, the company also markets anti-body reagent products to pharmaceutical, biotechnology and diagnostic companies under the Strategic BioSolutions brand name.
In the first nine months of 2007, Strategic Diagnostic grew sales 8% year-over-year to $19.9 million from $18.5 million and expanded net income to $694,000, or $0.04 per share, versus no net income one year ago. Although sales of food testing kits rose 23% and anti-body reagent sales improved 29%, these gains were offset by a 34% decline in the company’s genetically modified organism (GMO) business because of regulatory and policy changes affecting GMO testing.
The September quarter marked Strategic Diagnostic’s fifth consecutive quarter of double-digit anti-body reagent sales growth and the second consecutive quarter of 20+% year-over-year food pathogen testing sales gains. During the September quarter, the company introduced its Lumitester hygiene monitoring system, which opens new markets for Strategic Diagnostics in food service, food preparation and health care. Lumitester gives customers actionable information on how well their cleaning and sterilization programs are performing and delivers synergies with the company’s RapidChek food pathogen tests, including its new RapidChek SELECT test for salmonella.
In addition, Strategic Diagnostics added distributors in eight new international markets and announced its technology was selected to secure the drinking water supply at the Beijing Olympics. In its anti-body reagent business, the company announced a 250% increase in genomic anti-body technology-booked orders versus the June quarter. Significant new anti-body reagent production capacity will come on line later this year.
Analysts anticipate Strategic Diagnostics will produce greater than 100% growth next year as the company phases out its unprofitable GMO business and focuses on faster-growing food safety testing and anti-body reagent product lines. I anticipate 20% average annual longer-term growth for this company. My $7 price target for Strategic Diagnostics (SDIX) shares is above the current stock price of $5.32. Over the last 52 weeks, shares have ranged between $3.35 and $6.46.
