ARTIGO ESCRITO A 23 de SETEMBRO
Omega Protein Corporation: Fishing For Value
Sep. 23, 2014 4:03 PM ET | 2 comments | About: Omega Protein Corporation (OME)
Summary
Why such low absolute value for a niche market leader?
Is OME going to expand product offerings, thus, lower volatility?
The two potential outlooks for OME and corresponding valuations.
Omega Protein Corporation (NYSE:OME) is a producer of fishmeal and fish oil from Menhaden fish. The end products have omega-3 fatty acids. OME operates in the southern U.S. OME sells to two segments - animal nutrition and human nutrition.
Why is OME, a clear leader in a niche market, trading at such low multiples? The core operation, fishing, is inherently uncertain
Heavy reliance on one natural resource
Global supply and demand cause meaningful price fluctuations
Regulations limiting annual catch
Weather can significantly harm OME
The risks/uncertainties for OME are shown in past performance.
*Excluding $26.2M received in 2010 oil spill settlement
Global fish oil prices jumped 23% in 2013. This uncontrollable price swing illustrates the volatility of OME operations.
The OME Operating Segments
As stated a price spike boosted OME margins. On the other hand, the menhaden catch limit was lowered 25% in 2013. The two opposing factors resulted in stagnant revenue and margin expansion.
The human nutrition segment is experiencing strong top-line growth, but expansion efforts limit EBIT.
The catch limit is projected to remain at 2013 levels for the foreseeable future. This is likely the catalyst for OME closing the doors on its Cameron, LA plant while redeploying assets to their 5 other plants. The plant closing will lower fixed costs with hopes operating efficiencies will improve at the other plants.
Moving Forward
Management is not sitting on their hands. The acquisition of Wisconsin Specialty Protein, a specialty whey protein manufacturer, in early 2013 proves otherwise.
In the press release, Omega Protein President and CEO Bred Scholtes said "As a highly sought-after and differentiated ingredient, whey protein is a great complement to our existing line of value-added ingredients and advances our goal of providing sustainable, vital nutrition ingredients to the world. This acquisition positions Omega Protein to further leverage our human nutrition business through greater internal innovation, expanded distribution channels and additional strategic capital investment opportunities."
The comments illustrate the focus on the human nutrition segment with a focus beyond fish oil products. The diversification beyond menhaden derived products can provide future growth opportunities.
The U.S dietary supplement ingredient supplier industry is large, growing, and fragmented. Future acquisitions in the industry are likely, the question is how involved will OME be.
OME has a strong balance sheet with $0.98 in cash per share and $5.78 in working capital per share. OME has generated $1.23 in owner's earnings in the trailing 12 months.
The strong cash position for OME should allow for further acquisitions assuming management continues down their current path.
The Two Potential Outlooks for OME:
Outlook 1) A company reliant on one natural resource, menhaden, with volatile prices and catch limits that cap future growth potential.
Outlook 2) A nutritional ingredient supplier with a "staple" product that will be used to fuel expansion into other products.To add full context, OME is trading at ~8x trailing earnings. Both Ben Graham and the Katsenelson Absolute P/E Model assign a P/E of 7-8.5 for no growth companies.
The average P/E for OME over the past 10 years is 12.6. In the same period, revenue growth has been 10% CAGR.
*Earnings growth is skewed by single digit figure in early 2000s
Outlook One
From this vantage point, future growth will remain volatile and become increasingly limited by the catch restrictions. The best case outcome would be high single-digit growth for 2-4 years with long-term growth being lower.
OME has a strong balance sheet and trades at multiples for no growth companies, thus, any growth creates upside.
Using a DCF Model with 5% 5-year growth, 11% discount rate, and 2% LT growth; OME is worth $16.76 per share - a 17.5% margin of safety.
Using a pseudo-EBIT model. Assuming a fair P/E of 9, operating margin of 17%, and tax rate at 35%; OME is worth $14.57 per share - a 2.2% margin of safety.Despite low absolute value, this scenario does not provide enough margin of safety to offset the significant risks OME is subject to.
Outlook Two
The transition to a broader human nutrition segment will slowly stabilize OME performance. This would provide long-term growth potential.
The animal nutrition segment currently accounts for 87% of revenue. This means the impact of the human nutrition segment will be minimal in the short-term.
Using a DCF Model with 8% 5-year growth, 11% discount rate, and 3% LT growth; OME is worth $20.46 per share - a 43.5% margin of safety.
Using the same pseudo-EBIT model with margins and tax rate consistent, but a P/E of 12. OME is worth $19.11 per share - 33.9% margin of safety.
Conclusion:
Under either scenario, OME will have to weather the volatile environment of their business in the short-term. Investors who do not enjoy a bumpy ride should put their money elsewhere.
Despite trading at a valuation multiple of no growth companies and a strong balance sheet, the risks that OME carries are too great to offset the upside.
I categorize OME as a "wait and see" stock. If sufficient evidence emerges to support outlook two, OME would be an attractive stock at current price level.
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