Knowing Neogen (NEOG)

Neogen (NEOG) was featured as the Online Stock Study for September, a relatively new and super-solid educational feature at the BI/NAIC website.  Each month, a respected volunteer educator leads a live discussion where a SSG is completed in about one hour.  Decisions on the several SSG judgments are done by consensus voting of the participants.  This Online Stock Study was led by KenK who had also made his earlier SSG available on the Bi website.

Neogen, with $102.4 M in 2007 revenues, is a small company according to BI/NAIC criteria which uses sales and not capitalization to define size.  NEOG makes a diverse line of products for food and animal safety.  The Food Safety segment (56.3% of revenues) primarily offers diagnostic test kits and related products that detect dangerous or unintended substances in food.

NEOG is a tough stock to SSG because there are very few comparisons available to signal if our judgments are in the ballpark.  The company is in Value Line’s Small and Medium Cap edition which contains no High Price estimates and which I rely on all the time.  There is also no report from Morningstar or Wikinvest, and the S&P Stock Report contains no estimates of future growth.

 Here’s a comparison of four SSGs for Neogen:

Neogen      (NEOG)	KenK from          BI’s First Cut	BI Online        Stock Study	Take Stock	ArminF
Date	6-21-08	9-3-08	9-4-08	9-4-08
Data	S&P	S&P	Hemscott	S&P
Price	$23.88	$25.82	$25.33	$25.33
52 wk High &     Low Price	$28.50 &      $18.33	$28.50 &         $20.20	n/a	$28.50 &      $20.20
Project Growth   From	??	Last Annual	unknown	Last Quarter
Sales Growth	17.00%	16.70%               (last 5 yr ave)	15.70%	15.00%
EPS Growth	17.00%	16.6%                 (last 5 yr ave)	05.1%	15.00%
High PE	30.0                  (up from 29.2)	31.7                    (last 5 yr ave)	24.5	31.7             (ave Hi PE)
High Price	$50.70	$55.48	$20.31         ($5/sh <     cur price)	$51.70
Value Line Estimated High Price =NONE
Low PE	16.4                (ave Lo PE)	17.7                    (last 5 yr ave)	13.5	17.7              (ave Lo PE)
Low Price	$12.60	$14.34                  (Lo PE x Lo EPS)	$9.05	$14.50
Upside/Down	2.4	2.58	Impossible to Calculate	2.4
Total Return	16.3%	16.53%	-04.7%	15.3%
SSG Buy Under	??	n/a	$10.16	$23.80
RV/PRV	135.5/116.3      (no outs)	n/a	n/a	124.7/108.7   (no outs)
Quality	?? [see fn -A-]	?? [see fn -A-]	TS = 3.2 (un- acceptable)	S&P = B+
PTPM: 5 yr ave	15.3%           trend up	15.82%               trend n/a [fn -B-]	15.3%         trend n/a	15.8%         trend up
ROE: 5 yr ave     End Equity	10.9%           trend down	10.80%             trend n/a [fn -B-]	n/a	10.8%         trend even
ROE: 5 yr ave       Start Equity	n/a	n/a	12.4%        trend n/a	12.6%         trend even
Debt to Equity:    5 yr ave	n/a	n/a	n/a	04.9%         trend down

DISCUSSION:

(1) Online Stock Study SSG:

 – The Online Stock Study consensus chose 16.6%, the last 5 year average, as their estimate of future EPS for the next 5 years.  Participants were given four other choices: 15.5%, the last 10 year average; 16.7%, the same as their Sales estimate; 18.8%, the S&P estimate; or an open-ended “other. 

–  The Online Study used the BI/NAIC Online Tools to complete its SSG which offers no projection options unlike our SSG software.  Worse, the Online Tools SSG always starts the projection of future Sales and EPS growth from the last Annual data point, which I discovered by comparing SSGs, but sadly does not inform the user of this important judgment.

– The Online Study consensus also chose 31.7, the last 5 year average, as its Forecast High PE.  They also were given four other choices: 29.1%, the 10 year average; 31.8%, the last 2 year average; 35.2%, last year’s average; and an open-ended “other.”

 – The Online Stock Study got a 2.58 Upside/Downside Ratio which does not satisfy the 3.0 criteria and therefore is a SSG Hold (but do not Buy at this time).

 – The Stock Study ignored Relative Value because it relied on the BI Online Tools for its SSG which ignores RV.  RV is the Current PE divided by the 5 year Average PE and, if over 110, is one indicator that the stock may be overpriced.

 (2) Armin’s SSG:

– On 9-4-08, when I did my SSG, the analysts were closely estimating long-term EPS around 18.8% with Zacks and First Call via Yahoo low at 18.75% and FactSet CallStreet via CNNMoney high at 20.00%; Reuters via Morningstar, Value Line as of 6-6-08 and S&P were all 18.8%.  Oddly, the latest VL on 9-5-08 provides no long-term EPS estimate.

 

– To be thorough, I also did what NAIC-BI calls the Preferred Procedure (which I rarely find helpful).  The default PP resulted in 14.4% and there were no Value Line estimates to substitute for the default values. 

 

– NEOG’s historical EPS growth for the last 5 years was 16.6% and its Sustainable Growth rate was 12.6%. I decided to use 15.00% EPS as my estimate of future growth for the next 5 years, comfortably below the six analysts estimates that were around 18.8%.

 

– My Upside/Downside Ratio was 2.40 which is also a SSG Hold.  However, unlike the BI Online Tools, my TK5 software tells me that NEOG would satisfy the Buy criteria at a price of $23.80 based on my SSG judgments.

 – My SSG’s Relative Value/Projected Relative Value was 124.7/108.7 while KenK’s earlier SSG was higher at 135.5/116.3.  The BI/NAIC Stock Selection Handbook says that RV’s over 110 are higher than desired and mean that the current PE is more than the 5-year average.  Outliers that are eliminated affect RV; here, neither Ken nor I eliminated any outliers so our RVs are comparable.

 (3) KenK’s SSG:

 – Ken’s SSG increased its Forecast High PE by a trivial amount, from 29.2 historical Average for the last 5 years to 30.0 Forecast High PE for the next 5 years, which seems pointless to me.  Ken also did not increase his Forecast Low PE so maybe he has a special crystal ball.

 – Even though Ken estimated 17.0% EPS growth for the next 5 years, the highest of the three SSGs, he also got a SSG Hold as did the Online Stock Study and my SSG.

 (4) Take Stock:

 – Take Stock, compared to the other SSGs, seems outrageously and unreasonably extreme: for the next 5 years, it shows a 5.1% EPS growth estimate; a Forecast High Price of $20.31, some $5/share BELOW  Neogen’s CURRENT  price; and a -04.7% Total Return  (that’s a negative 4.7%).  Once again, Take Stock is whack-o.

 (5) Other Considerations:

 – One way to evaluate any company is to assess whether it is doing better or worse than its industry.  This is not easy for Neogen because just about every website places NEOG in a different industry: the Environmental Industry by Value Line; Health Care Supplies by S&P; Medical Products by Zacks; Diagnostics by Morningstar; Diagnostic Substances by MSN Money; Pharmaceuticals – Generic & Specialty by Reuters; and Biotechnology & Drugs by Google Finance.

 – According to Reuters.com, the results are mixed when NEOG is compared to its industry average: the company is better for TTM Pre-Tax Profit Margin (18.06% vs 1.31%), but lags its PTPM industry average for the last 5 years (15.92% vs 27.30%).  NEOG also is better for TTM Return on Equity (11.91% vs 1.57%), but lags its ROE industry average for the last 5 years (11.38% vs 12.06%).

 – In terms of PEs, Neogen substantially exceeds its industry and the S&P 500: High PE for the last 5 years (39.15 vs 0.57 vs 3.68); Low PE for the last 5 years (21.92 vs 0.36 vs 0.94); and TTM PE (32.76 vs 14.80 vs 16.37).  The SSG’s Relative Value scores confirm that NEOG’s PE is relatively high.

 – NEOG has been on Forbes’ list of the 200 Best Small Companies for three consecutive years and for six of the past 8 years.  Currently, it ranks 114 and was 150 in 2006.

 (6) Footnotes:

 [-A-] The S&P Quality Ranking was not mentioned in these 2 SSGs although KenK, the leader of the BI Online Stock Study, did find that NEOG passed four SSG tests for Quality: Sales and EPS Growth, Pre-Tax Profit Margin, and Return On Equity.

 [-B-] The Online Stock Study used the BI/NAIC Online Tools to assess PTPM and ROE that does not explicitly explain these trends, unlike our SSG software, which is a major shortcoming especially when the yearly values are close.   Another shortcoming is that the Online Tools compare NEOG to its peers and peer group average, and they are different from its close competitors which are Ibexx Labs (IDXX), Strategic Diagnostics (SDIX), and Applied Biosystems (pvt) which I learned from Hoovers.com and YahooFinance.

Examining EMC

Many companies accumulate vast amounts of data as they do business, especially large ones like banks, airlines, and insurance companies.  They have an ever-growing need to store, organize and retrieve that data.  EMC Corp is a full-service manufacturer and provider of high-end storage hardware, software and related services. 

 

According to Value Line, EMC’s price reached a high of $104.90 per share in 2002 and a low of $3.70 in 2002.  It is currently selling at $15.74, close to its 52-week low of $12 and was a featured stock in the September issue of the Investment Advisory Service’s newsletter.

 

Here is a comparison of IAS’s SSG with Take Stock and two SSGs of mine (one with S&P data and the other with Hemscott data, but both with the same judgments).

 

EMC Corp (EMC)	IAS	Armin-1	Armin-2	Take Stock
Date	8-6-08	8-22-08	8-22-08	8-23-08
Data	S&P	S&P	Hemscott	Hemscott
Price	$14.79	$15.74	same	$15.74
52 week High & Low Price = $25.47 & $12.06
Sales Growth	15.00%	10.00%	same	8.00%
EPS Growth	15.00%	10.00%	same	2.5%
High PE	25.0	28.5 (3 outs)	27.0 (same)	30.0
High Price	$36.80	$34.50	$36.20	$26.70
Value Line Estimated High Price = $20-35 as of 7-11-08
Low PE	15.0	19.6 (3 outs)	19.5 ( same)	11.7
Low Price	$11.00	$10.60 (ave low)	same	$13.19
Upside/Down	5.8	3.4	4.0	4.3 (imputed)
Total Return	20.0%	17.0%	18.1%	05.4%
SSG Buy Under	$17.45	$16.35	$17.00		$13.35
RV/PRV	66.1/57.5	87.1/79.2	81.5/74.00		N/A
RV/PRV (no outs)	66.1/57.5	70.5/6	65.1/59.0		N/A
Quality	B	B	Not Rated		2.6 below minimum
PTPM – 5 yr ave	14.5% trend even	14.5% trend even	14.7% trend up	14.5% trend N/A
ROE – 5 yr ave End Equity	09.4% trend up	09.4% trend up	09.8% trend up	N/A
ROE – 5 yr ave Start Equity	10.5% trend up	10.5% trend up	10.9% trend up	10.9% trend N/A
Debt to Equity –  5 yr ave	12.9% trend up	12.9% trend up	12.2% trend up	N/A

 

– When I did my SSGs, the analysts were estimating long-term EPS at around 14%.  FactSet CallStreet and Zacks were high at 15.00% while First Call was low at 12.86%.  Value Line was 13.50% and S&P as well as Reuters via Morningstar were 14.50%.  The average of all six was 14.23% and the average less one Standard Deviation was 13.38%.

 

– I estimated 10.00% EPS while IAS used 15.00%.  With S&P data, my analysis resulted in a SSG Buy with a 3.4 Upside/Downside Ratio and a 17.0% Total Return, and my Forecast High Price was just under Value Line’s estimate.  With Hemscott data and the same judgments, I got a 4.0 Upside/Downside and a 18.1% Total Return.

 

– IAS also got a SSG Buy, but with higher values, probably because IAS started with a higher EPS estimate of 15.0%.  IAS had a 5.8 Upside/Downside Ratio and a 20.0% Total Return.

 

– Take Stock was nuts with a low-ball and unrealistic 2.50% EPS estimate for the next 5 years which led directly to an unreliable 5.8% Total Return.