Shares of Neogen Corp. NEOG lost 2.12% ($1.03) value to close at $47.64 on Mar 26, after the company reported an unimpressive third quarter of fiscal 2015. EPS of 20 cents missed the Zacks Consensus Estimate by 3 cents, while revenues of $68.4 million lagged the consensus mark of $70 million.
However, on a year-over-year basis, EPS increased 11.1% on the back of double-digit revenue growth and improvement in operating efficiencies. The 10.4% revenue growth was primarily driven by synergies from year-ago acquisitions, partially offset by negative impact from foreign exchange adjustments ($1.5 million). Organically, revenues increased 7% on a year-over-year basis.
Segment Details
Revenues from Neogen’s Food Safety business surged 14.1% to almost $32 million, aided by the BioLumix acquisition that was acquired in Oct 2014. The company’s Scotland-based European subsidiary also reported strong performance, partially offset by negative impact of a strong U.S. dollar against pound sterling.
Neogen's revenues from rapid tests for food allergens soared 15% in the third quarter driven by the company’s effective response to the discovery of large-scale contamination of cumin and other spices with peanut and other known food allergens. Natural toxin test kits sales increased 6% year over year, driven by a 27% surge in sales of kits used to detect deoxynivalenol (DON).
Neogen’s timely response to an outbreak of the DON toxin in the North American and European wheat crops expanded the DON toxin test kits’ market penetration. It also more than offset a slight decrease in sales of kits to detect aflatoxin in the quarter.
Neogen's general microbiology products sales surged 47% in the quarter, driven by the BioLumix acquisition. Sales of Soleris disposable vials increased 11%, while that of BioLumix products exceeded management’s expectations in the very first full year post acquisition.
Animal Safety revenues improved 7% year over year to $36.4 million. The upside was significantly driven by robust performance from the Chem-Tech agricultural insecticides business the company acquired in Jan 2014.
Rodenticides revenues soared nearly 40% driven by company’s immediate response to a rodent outbreak in orchard crops and growing acceptance of its products in the important agricultural rodenticide market.
GeneSeek revenues increased approximately 29% on the back of increased adoption of its genomic products and higher capacity that boosted supply of the products.
Operational Details
Gross margin contracted 20 basis points (bps) on a year-over-year basis to 49.3%, primarily owing to unfavorable product mix.
Operating expenses, as a percentage of revenues, decreased 140 bps to 31.5% in the quarter. The decline resulted from improved operating efficiencies. As pa ercentage of revenues, sales & marketing and administrative expenses decreased 80 and 70 bps, respectively. However, research & development expenses increased 10 bps.
Operating margin expanded 120 bps buoyed by increased revenues and lower operating expenses.
Balance Sheet
Neogen had cash and investments of $102.1 million as of Nov 30, 2014, up from $94.3 million as of Nov 30, 2014. The company had no long-term debt at the end of the quarter.
Our Take
Although Neogen’s EPS and revenues missed the Zacks Consensus Estimate, the company continues to show progress on the back of core business expansion and successful integration of 2014 acquisitions.
Neogen is creating a direct presence in important global markets through the acquisition of successful distributor partners in Europe, Brazil and most recently China. Moreover, in the next several months, Neogen plans to combine BioLumix with its closely related Soleris technology, which will greatly enhance this business.
However, Neogen continues to face currency headwinds which make its products less competitive internationally.
Zacks Rank
Currently, Neogen carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical products industry include Abaxis ABAX, Hospira HSP and LeMaitre Vascular LMAT. All the stocks sport a Zacks Rank #2 (Buy).
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