Investopedia: Neogen's Valuation Defies Gravity

While investors are often willing to pay high premiums for above-average growth, many companies see significant underperformance in their stock when they transition to a slower growth profile. That has not yet happened at Neogen (Nasdaq:NEOG). While it may indeed be premature to say that this food safety and animal health company is past its days of double-digit organic growth, the expectations that the Street has baked into this valuation seems difficult to justify.

A Sluggish Quarter, as Expected
To its credit, management didn't serve up any particular negative surprises this quarter. Revenue growth was sluggish at 6.3%, but broadly in line with expectations. Although there were some solid individual performances this quarter (veterinary products up about 30% and animal care up around 40%), it looked more as though the company saw a lot of individual items compress the growth - from de-stocking in Europe to tougher comps from vomitoxin sales last year and so on.

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Investopedia: Neogen Is Almost Cheap

Investors who want to play the really interesting stories in med-tech have to be ready to act fast or step up when times look uncommonly tough. That's about the only way to get a decent valuation on stocks like Intuitive Surgical (Nasdaq:ISRG), Cepheid (Nasdaq:CPHD) or Illumina (Nasdaq:ILMN), and that seems largely true for animal and food safety specialist Neogen (Nasdaq:NEOG). Although valuation and earnings quality are still problematic here, these shares also highlight the importance of being up-to-date on research and able to pull the trigger quickly.

A Disappointing Second Quarter  
Although Neogen doesn't generally step far out of line, this quarter was a notable exception. Revenue rose just 2% this quarter, not only missing the averaged estimate but missing the low-end estimate as well. Animal safety revenue was up just 1%, due at least in part to lower activity in the GeneSeek agricultural genomics business. Food safety was hardly stellar, though, as revenue was up just over 3% this quarter.

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Investopedia: 2011 - Another Sick Year For Larger Med-Tech

Healthcare may not have been in the emergency room, or even the ICU, during 2011, but this sector was sick from beginning to end. Unfortunately, the story that was true in 2010 is still true today - higher unemployment means fewer people with health insurance, and even those with coverage are more nervous about taking time off or meeting their copays. At the same time, hospitals and the federal government continue to draw hard lines on pricing, and there have been few innovative product launches to stimulate new markets.


Just to frame the discussion, the Dow Jones U.S. Medical Devices Index Fund (NYSE:IHI) has fallen more than 5% year-to-date as of this writing.

A Very Familiar Name on Top
Yet again, one name dominated the list of top-performing med-techs. Intuitive Surgical (Nasdaq:ISRG) is still really the only game in town when it comes to surgical robots, and demand for these devices has remained high despite a fairly conservative environment for hospital equipment. Intuitive has seen revenue rise nearly 30% over the trailing twelve months, while the stock has jumped nearly 70%. Trading at over 23 times EBITDA and nearly 10 times revenue, this is hardly an undiscovered bargain in the space, but it does offer the growth that institutional investors are so desperate to find. (For related reading, see A Primer On The Biotech Sector.)


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Investopedia: VCA Antech Cut Down To Value

I have been writing about VCA Antech (Nasdaq:WOOF) for years, albeit not always on a consistent basis, and I clearly remember the baying, barking, and growling from longs when I used to question the company's valuation and business model. This was back when the stock traded in the $30s, mind you, and everyone believed that the veterinary practice roll-up model was bulletproof. Well, I wasn't short the stock then (nor am I now) and I wasn't being paid by hedge funds (nor am I now), but I was right - the business model couldn't support the valuation and investors who ignored the warning signs and hung on took a bruising. (To know more about stock valuation, check out: DCF Valuation: The Stock Market Sanity Check.)

Nowadays, though, it is a different story. I still do not believe that business models predicated on continual acquisitions can work (it's been tried over and over again in people-medicine), but the fact remains that VCA Antech now has a leverageable installed base and an undervalued cash flow stream.

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