2023-09-28 15:13:57 ET
Summary
- Neogen toned down guidance ahead of the upcoming Q1 earnings report, citing weaker conditions in China.
- The company is benefiting from its 2022 acquisition of 3M Corp's Food Safety, although comparable sales have trended softer.
- The company will need to re-accelerate growth to hit 2025 financial targets.
Neogen Corp. (NEOG) is a global leader in food and animal safety diagnostic tests and equipment. This segment includes various clinical consumables, hardware, and specialized software used to detect pathogens and monitor sanitation.
We previously covered NEOG back in 2019 highlighting momentum in the company's genomics segment utilized in selective livestock breeding. While the stock was a big winner during the pandemic, a lot has changed with a shifting macro backdrop and some challenges attempting to integrate the 2022 acquisition of 3M Corp's (MMM) Food Safety division.
Management recently offered some preliminary guidance ahead of the upcoming quarterly results, citing growth "slightly below expectations" and weaker conditions in China. In our view, the company maintains overall solid fundamentals, but higher risks should keep shares volatile through 2024.
NEOG Q1 Earnings Preview
Neogen is set to report its fiscal 2024 Q1 earnings on October 10. The consensus for EPS of $0.13, if confirmed, would represent a -17% decline from $0.15 in the 1Q23 period. The current market revenue forecast of $231 million, is technically 75% above the result last year, capturing the impact of the 3M Foot Safety deal which closed in September last year.
In Q4 "pro forma core growth " as a more comparable measure climbed by 4.3% y/y with management suggesting at the time that Q1 would be the seasonally weaker period for the full year.
That being said, the latest indications are that trends are coming in at the lower range of estimates. Neogen participated in a Healthcare Investors conference earlier this month, setting a more cautious tone .
Beyond the comments that core growth was modestly negative and slightly below expectations, the nugget that stood out was an indication of broad weakness in China. In our view, phrases like "soft end market conditions" in the legacy Neogen Food Safety division, and even softer Genomics sales simply don't inspire much confidence.
Still, it's important to place these trends into context. Even with the weaker topline momentum, the story in recent quarters had been firming margins amid easing supply chain shortages and inflationary cost pressures compared to last year.
The stock price chart for NEOG since 2021 is ugly, but keep in mind that shares are also up nearly 25% this year with some underlying improvement in profitability. Q4 adjusted EBITDA margin at 26.1% climbed from 22.9% the year prior, with room to further capture 3M Food Safety synergies going forward. These metrics will be key monitoring points in the Q1 results.
What's Next For NEOG?
There's a lot to like about Neogen, which we view as at the intersection of healthcare, agriculture, and consumer staples. The major high-level trend in food safety has been the increasing use of technology across the supply chain from crop growers, livestock breeders, processors, and packaged food manufacturers, down to retailers to ensure sanitation and consistent quality.
In many ways, the pandemic re-enforced this importance with a major push in emerging markets including Latin America and Asia Pacific to invest in the types of products Neogen offers. Management notes estimated long-term growth between 4-8% annually between food and animal safety, while genomics is a stronger, faster-growing segment with growth in the double digits. Naturally, these are favorable long-term tailwinds the company is well-positioned to benefit from.
Still, what's more pressing for the stock in the near term are rising uncertainties and current macro headwinds. We mentioned China as a weak spot for Neogen into 2024. The concern here is that a broader slowdown in the Chinese economy spills over into other emerging markets.
As it relates to NEOG stock, the question is whether Neogen remains on track to hit announced 2025 targets. Management has previously cited a goal of reaching $1 billion in annual sales, adjusted EBITDA around $300 million, and an EBITDA margin near 30%.
In our view, these estimates are at risk, or at least aggressive under the current circumstances. Considering the annualized consensus Q1 revenue run rate approaching $924 million, the company will need to capture some sort of growth re-acceleration in the next year. Similarly, the adjusted EBITDA margin target of 30% still has a long way to go.
In terms of valuation, NEOG is trading at a 19x EV to forward EBITDA multiple or even 31x on a forward P/E basis seems rich for a company with pro forma growth in the low single digits and a consensus outlook for EPS to climb just 5% this year.
NEOG Stock Price Forecast
We rate NEOG as a hold with a price target for the year ahead at $20.00 representing a 20x EV to forward EBITDA multiple implying the current level is near value. The point we are getting at here is that the current trends make it harder and harder to justify a big breakout higher in shares.
On the upside, NEOG will need the macro picture to cooperate with some evidence that conditions in China are firm. Successful execution by management to keep pushing margins higher over the next few quarters will be an important step to help shares rebuild momentum.
For further details see:
Neogen Corp. Stock: Cloudy Growth Outlook Into 2024