Bear of the Day: Neogen (NEOG) – Bear of the Day

Neogen (NEOG) recently delivered an earnings miss for the second quarter of its fiscal 2014 as profit margins declined significantly.

Analysts unanimously revised their estimates lower for both 2014 and 2015 following the Q2 miss, sending the stock to a Zacks Rank #5 (Strong Sell).

With shares trading at a forward P/E north of 50, investors should consider avoiding this stock until its earnings momentum improves.

Neogen develops and markets food and animal safety products. Its Food Safety Division, which has accounted for 49% of total revenue year-to-date, markets dehydrated culture media and diagnostic test kits. Its Animal Safety Division (the other 51% of revenue) develops animal genomics and manufacturers and distributes a variety of animal healthcare products.

Second Quarter Results

Neogen reported its fiscal 2014 second quarter results on December 19. While revenue came in slightly above consensus, earnings missed by a wide margin. Q2 EPS was 17 cents, well below the Zacks Consensus Estimate of 25 cents.

Total revenue grew a solid 17% year-over-year. Revenue in the Food Safety division climbed 9% while the Animal Safety division saw top-line growth of 26.3%, driven in part by acquisitions.

However, EPS fell 11% year-over-year as profit margins declined significantly. Gross profit as a percentage of total revenue decreased 430 basis points from the same quarter last year to 49.5%.
The operating margin also fell 430 basis to 16.3%.

Estimates Falling

Following the Q2 miss, analysts unanimously revised their estimates lower for Neogen for both 2014 and 2015. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2014 is now $0.80, down from $0.87 before the Q2 report. The 2014 consensus is currently $0.93, down from $1.02 over the same period. You can see the negative earnings momentum in the company’s ‘Agreement’ and ‘Magnitude’ charts:

Premium Valuation

Shares of Neogen are down more than 5% since the Q2 report. But this stock doesn’t look like a value yet. Shares are trading at a lofty 57x 2014 consensus EPS.

The Bottom Line

With negative earnings momentum and premium valuation, investors should consider avoiding Neogen for now.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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