Neogen's growth to be fueled by food safety and international markets

Jennifer Schonberger | Feb 20, 2008 10:42am EST | Comment

Rating: Unrated [rate it]

SmallCapInvestor.com reporter Jennifer Schonberger is reporting from the 20th Roth Capital Partners Annual OC Growth Stock Conference this week in Dana Point, Calif. The conference features presentations from more than 300 small-cap companies.

In the past six months, there have been 10 highly publicized food recalls involving harmful pathogens, such as E. coli and salmonella. With recent incidents of major food, produce and other product recalls, Neogen Corp. (Nasdaq: NEOG), maker of diagnostic kits to test the safety of food and animal products, is profiting.

“There’s no question that the increased attention and consumer activism has brought some pressure to bear, which has resulted over time with new regulation,” said Lon Bohannon president and chief operating officer of Neogen in an interview at the 20th annual Roth OC Growth Stock Conference this week in Dana Point, Calif. “We’re going to have strengthening imports at our borders, which should result in more testing going forward. Additionally, a lot of industries are taking a look at what they need to do in terms of quality and food safety. All of that has resulted in an increase.”

Markets are growing faster for Neogen on the food safety side because of greater awareness both domestically and internationally.

Going forward international markets should fuel growth for Neogen. According to Bohannon, international markets are twice as large as the domestic market for the company. Three years ago international sales comprised 26% of total sales, compared with 40% of total sales for the first half of fiscal 2008, ended Nov. 27, 2007.

Tighter regulations in Europe should assist in fueling future growth for the company. For the first half of fiscal 2008, Neogen Europe saw sales increase by 35% alone, compared with sales growth of 21% in fiscal 2007.

Brazil (as it becomes a major exporter of agriculture), Mexico, the Philippines and Thailand were other areas Bohannon mentioned as regions with international growth prospects.

China is also an area in which management will look to augment business; however, Bohannon said that since China is still in its infancy with regard to food safety, the company will deploy resources there as the market prevails, so as not to waste resources.

Neogen has also increased its geographical reach through its acquisition of Rivard Instruments, Inc., a manufacturer of detectable veterinary hypodermic needles, as part of a settlement for lengthy litigation with the company regarding numerous patents owned by each.

“Rivard had patents issued in countries that Neogen didn’t have,” said Bohannon. “We’ve strengthened our intellectual property position around the world and brought with it sales and key relationships with distributors which will help us to expand that business. It gives us good reach in Europe, Australia and Canada.”

For its second quarter fiscal year 2008 ended Nov. 30, 2007, the latest financial period for which data was available, the Lansing, Mich.-based company recorded net income of $3.25 million, or $0.22 per diluted share, adjusted for a 3-for-2 stock split, a 34% increase from the $2.43 million, or $0.17 per diluted share earned in the year ago quarter. The consensus of three analysts polled by Thomson Financial was for $0.21 per share for the second quarter.

Revenues for the second quarter increased 22.6% to $27.21 million, compared with $22.19 million booked in the same period last year. Results were reported on Jan 3.

For the third fiscal quarter of fiscal year 2008, both Roth Capital analyst Anton Brenner and Susquehanna Financial analyst Amy Stevens are forecasting earnings of $0.18 per share. The company earned $0.14 per share in the third quarter of fiscal 2007.

For the fiscal year ending May 31, Brenner is forecasting earnings of $0.81 per share on revenues of $101.7 million, while Stevens is forecasting earnings of $0.80 per share on revenues of $103.3 million. The consensus of three analysts polled by Thomson Financial is for earnings of $0.80 on revenues of $102.46 million for the fiscal year.