Neogen (NEOG) Up 15.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Neogen (NEOG). Shares have added about 15.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Neogen due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Neogen’s Q3 Earnings & Revenues Miss, Margins Fall

Neogen’s third-quarter fiscal 2020 earnings per share of 23 cents lagged the Zacks Consensus Estimate of 27 cents by 14.8%. The fiscal third-quarter earnings per share lagged the year over year figure of 25 cents as well by 8%.

Revenues in the quarter grew 2.2% on a year-over-year basis to $99.9 million, missing the Zacks Consensus Estimate of $102.1 million by 2.2%.

Per Neogen, the company registered modest contribution by the genomics services (2%) and growth in a number of its food safety product lines despite the global threat posed by the coronavirus pandemic. The company also made four acquisitions to enhance its global foothold, which includes the recent acquisition of its distributors in Argentina and Uruguay. Also, the recent purchases of its food safety distributors in Australia and Italy are expected to aid the company’s top-line. Neogen also registered strong top-line contribution from most of its key geographies.

The fiscal third quarter was the 112th of the last 117 quarters to mark a year-over-year revenue increase.

Segments in Detail

Food Safety Segment: For the quarter under review, revenues in the segment totaled $50.5 million, down 1.2% year over year. The year-over-year decline was driven by a significant decrease in sales of drug residue test kits after Neogen’s exclusive relationship with its distributor of dairy antibiotic tests in Europe ended during the quarter. Another factor denting the segment’s revenues is the loss of forensic kit sales in Brazil due to a large number of customers switching to an alternative technology platform. However, the decline in revenues was partially offset by 5% growth in the sales of the company’s general sanitation products (including its AccuPoint Advanced product line), 4% increase in rapid diagnostic tests sales, and 4% rise in Neogen’s food allergen product line.

Animal Safety Segment: During the fiscal third quarter, the segment recorded revenues of $49.4 million, reflecting 5.9% growth from the year-ago quarter. The uptick mainly resulted from the domestic genomics business, with additional incremental volume of rodenticides, insecticides, and certain cleaners and disinfectants. The company’s global animal genomics business recorded an uptick of 8% in the reported quarter resulting from strength in the domestic companion animal market, and the global genomic testing of beef and dairy cattle, swine, and poultry. In the reported quarter, Neogen also launched Igenity + Envigor. Per the company, it is the first and only genetic test in the beef industry that measures heterosis in crossbred cattle.

Margin Details

Gross margin contracted 29 basis points (bps) to 45.4% in the fiscal third quarter.

Sales and marketing expenses increased 5.7% to $17.7 million, whereas administrative expenses rose 7.7% to $10.8 million. Research & development expenses were $3.8 million, up 17.7%. All the expenses pushed up the operating costs by 7.7% to $32.3 million.

During the reported quarter, operating income was $13 million that declined 10.9% from the year-ago quarter’s $14.6 million. Operating margin contracted 192 bps to 13.1%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -11.7% due to these changes.

VGM Scores

At this time, Neogen has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Neogen has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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