Neogen Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Neogen Corporation is a global manufacturer and marketer of food and animal safety products, focused on diagnostics, sanitation, and genetic testing solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Neogen operates in two primary segments: Food Safety and Animal Safety.

  • Food Safety: The segment provides a range of diagnostic test kits, culture media, and related products that help detect harmful pathogens, toxins, allergens, and other contaminants in food and feed. These products are used by food producers, processors, and laboratories globally to ensure safety and quality. This also includes food animal safety and genetics.
  • Animal Safety: This segment manufactures and distributes a variety of products used to diagnose and treat animal diseases as well as to maintain animal health and wellness and includes products related to animal genomics testing services. They are primarily used in the veterinary and agriculture markets. This segment provides solutions to detect and mitigate animal disease, including those that impact food animals.

Neogen’s revenue distribution is diverse, both geographically and by product type:

  • The US is the largest market, followed by Europe and then emerging markets such as Latin America, Asia and the Middle East.
  • Revenue is generated from a mix of product sales, service revenue, and testing revenues.

Industry and Competitive Landscape

The markets Neogen operates in are characterized by both resilience and competition. Here are some key points:

  • Food Safety Market: Growing concerns about food safety due to foodborne illness outbreaks, stricter regulations, and increasing consumer awareness are driving growth in this market. However, this is a relatively mature market with many competitors.
  • Animal Safety Market: This market is driven by factors such as increasing disease outbreaks and the growth in animal protein consumption and a renewed focus on animal health. The market is experiencing growth due to increasing importance being placed by government bodies and consumers on animal health and welfare.
  • Competitive Environment: Neogen operates in a competitive environment, with major players including Thermo Fisher, Merck, and Idexx, as well as numerous smaller private companies. Barriers to entry are variable, with some products requiring advanced technology and significant research and development investment. But many of Neogen’s products are of standard quality and do not present a barrier of entry to other players.
  • Industry Trends:
    • Increase in food safety regulations around the world with increased consumer awareness and government focus.
    • Rising animal protein consumption, especially in emerging markets, creates opportunities for new products for animal health.
    • Growth in precision animal management and genomics is driving the demand for advanced testing and genetic services.

Financial Analysis

Neogen’s financial performance has shown a combination of steady growth and recent challenges.

Revenue Trends:

  • Neogen’s revenues have increased to $824.6 million in fiscal year 2023, from $515.9 million in 2021 and $575.0 million in 2022, indicating substantial growth with recent acquisitions.
  • However, while total revenue growth is present, the organic growth is slower. Specifically, Food Safety segment net sales were $548.6 million compared to $555.9 in FY22 (-1.3% decline) while organic sales for the Animal Safety segment were up 4.5% compared to last year, with total animal safety net sales up by 15.3% compared to 2022 due to a major acquisition.
  • Guidance: The company stated in their latest earnings call that the revenue would range from $870M to $910M in fiscal year 2024. Profitability:
  • Gross margins in fiscal year 2023 have improved to 46.2%, compared to 44% in the previous year due to decreased freight and raw material costs. The company however mentions that the supply chain issues are still a challenge and margins can be volatile. The company reports adjusted gross margin is at 50.4% showing a difference between GAAP and Adjusted margins because of accounting differences.
  • Operating margin in fiscal year 2023 was at 11.8%, which indicates good operating efficiency.
  • However, if you adjust the 2023 metrics for one time charges, both adjusted gross margin and adjusted operating margin would have been roughly around 50% and 19% respectively (according to earnings calls) implying a significant impact of one-off expenses on reported metrics.
  • A recent trend the company seems to be focusing is growing the profitability. The company has stated this as a goal for 2024. Balance Sheet:
  • Cash and cash equivalents were at $111.1 million at the end of the fiscal year 2023.
  • There was significant debt increase in fiscal year 2023 due to the acquisition of 3M Food Safety Business, leading the long-term debt to increase to $1.22B.

Financial Stability

  • The increase in long-term debt has put some pressure on its financials. Even if its revenues grow by approximately 10%, the company’s interest expense can create problems for the company in the near-term.
  • Given its high debt, the company will have to generate sufficient free cash flow to meet its obligations.
  • The company has a good revenue stream which provides it cash for it operations and management believes that the recent acquisition of 3M Food Safety business will add significant revenues to the company. The acquisitions are expected to create value in the long term.
  • Management also states in earnings calls that they are planning to reduce their leverage, which will improve their solvency.
  • Overall, management’s priority will be to use future profits to reduce debt and invest in new acquisitions.

Recent Developments:

  • Acquisition of 3M Food Safety Business was completed on January 3, 2023 with a $5.3 billion valuation. The acquisition involved borrowing of a lot of money and the integration is still ongoing. Management expects this acquisition to be accretive to shareholder value in the long term.
  • The company has focused its future to growing the animal safety segment as the growth prospects are stronger.
  • Management has also indicated that they will continue to focus on reducing costs, which will increase profitability in the long-run.
  • The company is focusing on increasing cross-selling and utilizing their sales network for other products.
  • Management mentioned that it expects to gain greater efficiencies and synergies from the recent acquisitions.
  • The company expects continued inflation and global supply chains to affect its short term financial results.
  • The company is projecting an adjusted gross margin to be around 50% and to continue to grow in fiscal year 2024.

Moat Assessment

Neogen has a moderate moat, which is mostly driven by:

  1. Brand and Reputation: Neogen has built a reputation as a reliable provider of food and animal safety products, and its products are known for the quality they provide.
  2. Switching Costs: Neogen’s customers in the food and animal safety industries are often very particular about quality and they typically find switching products costly. Therefore switching is difficult in some cases and provides them some pricing power.
  3. Regulation: Regulatory approvals and procedures often form a barrier in the market, giving companies like Neogen certain advantages over newcomers.

However, the moat is not very wide as they also operate in very competitive industries, the company faces competition from many large companies who are also able to take advantage of cost efficiencies and economies of scale and also they can compete on price.

  • Therefore, this gives Neogen a 3/5 moat rating, implying that their competitive advantages are significant and can provide some degree of protection from competition, but are not insurmountable and could be eroded over time.

Legitimate Risks

The following are some risks that could harm Neogen’s moat and business resilience:

  1. Integration Risk: The recent acquisition of 3M Food Safety Business brings with it a considerable integration risk. The integration might take long and cause inefficiencies, lower expected synergies, or even require restructuring charges.
  2. Competition: The market is highly competitive and they could see their margins erode if they fail to innovate or provide better products at better prices than their competitors.
  3. Economic Slowdown: An economic slowdown or an increase in inflation could impact sales by lowering demand or by increasing operational expenses. This will especially impact the margins of the company.
  4. Regulatory Changes: Any negative shift in regulations, or a failure to comply to existing regulations, can harm the profitability and business performance.
  5. Supply Chain Issues: Volatility and disruption of the supply chains can affect the sourcing, pricing and manufacturing of the goods of the company.
  6. Loss of Key Personnel There may be a change in top level personnel and some people that are responsible for the past growth of the company, may choose to leave which can have ramifications on performance.

Business Understandability

Neogen’s business model is moderately complex and a 3/5 understandability rating is appropriate.

Justification:

  • The basic products of the company are easy to understand, as they relate to simple diagnostic and testing solutions. However, understanding the full breadth of their product portfolio, various markets, regulations, etc requires more effort.
  • While the financial statements are not the most complicated, understanding and analyzing the effects of acquisitions, goodwill amortization and non-recurring charges needs some expertise.
  • Further study is needed to determine how competitive the individual segments are and their long term future.

Balance Sheet Health

Neogen’s balance sheet health is rated 3/5 (moderate).

  • While there are no issues with current liabilities or immediate risks to the company’s operations, the long term-debt at $1.22B is high and makes the company more susceptible to any fluctuations in the economy or the markets.
  • The long-term debt has also created a larger level of interest payment, which can reduce the cash flows available to the company.
  • On the positive side, the company is asset-rich and generates sufficient revenues to cover their short-term expenses. The company has significant goodwill, but management has a plan to decrease debt and improve profitability in the future and they are implementing measures for that.

Conclusion

Neogen is a company with a moderate moat in relatively competitive markets. While its current financials are impacted by the 3M Food Safety Business Acquisition, there is long term potential for growth. As a mature company that operates in diverse markets, there are significant risks that investors need to consider when investing. Overall, Neogen is a fairly strong company but requires continuous assessment and management monitoring to ensure sustainability.