Neogen Corporation
NEOG
is well poised for growth in the coming quarters, backed by strength across the Food Safety and Animal Safety segments. The company’s latest agreement with
3M Company
MMM
and other strategic collaborations raise investor confidence. Robust international performance also buoys optimism. However, declining cleaners and disinfectants sales and mounting operating expenses do not bode well for the company.
Over the past year, the Zacks Rank #2 (Buy) stock has declined 6.9% against a 9.6% fall of the
industry
and a 24.6% rise of the S&P 500.
The renowned food and animal safety products provider has a market capitalization of $4.19 billion.
Over the past five years, the company registered earnings growth of 8.6%, ahead of the industry’s 7.0% rise and the S&P 500’s 2.8% increase. The company projects 13.6% growth for the next year, compared with the industry’s growth projection of 19.7% and the S&P 500’s projected 3.8% growth.
Image Source: Zacks Investment Research
Let’s delve deeper.
Factors At Play
Q2 Upsides:
Neogen exited the fiscal second quarter with better-than-expected revenues. Top-line growth was driven by strength in the company’s Food Safety and Animal Safety segments. The integration of CAPInnoVet into Neogen’s business appears to be promising. The ongoing rebound in the company’s business from COVID-led impacts also instills optimism. The expansion of gross margin is an added advantage.
Food Safety Sales Growth Continues:
Neogen continues to see rising revenues from the Food Safety business. For the fiscal second quarter, the company registered Food Safety revenues growth of 16.7% year over year, led by contributions from the December 2020 acquisition of Megazyme and the Soleris product line. The upside in this arm was also driven by robust growth across the company’s diagnostics portfolio, which includes increases of 11%, 10%, 6% and 8% in culture media, natural toxins, allergens and general sanitation product lines, respectively.
International Business Expands:
We are upbeat about Neogen’s international operations, which registered 20% growth in sales for the fiscal second quarter. On a year-over-year basis, revenues from Neogen’s worldwide animal genomics business increased 8% in the quarter, primarily driven by consistent strength in beef and dairy cattle, sheep and poultry markets. Neogen’s Australasia revenues surged 27% in local currency on beef and sheep animal genomic services and diagnostic product sales expansion. Meanwhile, revenues from China climbed 28% on new sales of Megazyme products and solid growth in genomic services.
Strategic Partnerships Deals:
Neogen has inked a series of partnership deals lately, which are anticipated to aid in the company’s segmental growth as well as international expansion. In December 2021, Neogen entered into an agreement with 3M to combine the latter’s Food Safety Business with its existing operations. Meanwhile in June 2021, the company extended its strategic partnership with Gencove, Inc. to continue the development of robust and innovative animal genomic testing. Neogen’s other notable partnerships with Transnetyx and National FFA also raise investor optimism.
Downsides
Declining Product Sales:
Sales of Neogen’s dairy drug residue test kits fell 23% in the fiscal second quarter due to the termination of an arrangement with a European distributor and persistent competitive pressure in this product line. Cleaners and disinfectants also saw a 2% drop in revenues year over year.
Mounting Expenses:
During the fiscal second quarter, Neogen’s sales and marketing expenses rose 19.5%, while administrative expenses increased 85.5%, and research & development expenses surged 6.8% from the year-ago quarter, respectively. The rise in operating expenses pushed up operating costs by 41.7% year over year.
Estimate Trend
The Zacks Consensus Estimate for Neogen’s fiscal 2022 earnings is pegged at 66 cents, suggesting a 15.8% rise from the year-ago reported number.
Meanwhile, the Zacks Consensus Estimate for fiscal 2022 revenues is pegged at $527.9 million, indicating a 12.7% increase from the fiscal 2021 reported figure.
Key Picks
Other top-ranked stocks in the broader medical space that investors can consider are
Baxter International Inc.
BAX
and
Apollo Endosurgery, Inc.
APEN
.
Baxter, carrying a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 9.5%. Baxter’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 10.2%, on average. You can see
the complete list of today’s Zacks #1 Rank stocks here.
Baxter has outperformed its industry over the past year. BAX has gained 8.8% against the 10.3% industry decline.
Apollo Endosurgery, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7%. Apollo Endosurgery‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.
Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 50.4% versus the industry’s 4.8% fall.
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