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Neogen's (NEOG) Q3 Earnings Miss Estimates, Margins Down

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Neogen Corporation (NEOG - Free Report) reported third-quarter fiscal 2022 earnings per share (EPS) of 13 cents, in line with the year-ago EPS. However, it missed the Zacks Consensus Estimate by 13.3%.

Revenues for the fiscal third quarter increased 9.9% on a year-over-year basis to $128.2 million. It missed the Zacks Consensus Estimate by 1.4%. Per the company, the third quarter marked the 119th of the past 125 quarters in which Neogen reported year-over-year revenue increase.

Segments in Detail

For the quarter, the company registered Food Safety revenues of $62.8 million, reflecting 7% (up 4% organically) year-over-year growth. The Soleris product line continued to gain market share during the quarter, registering a 10% rise on robust equipment sales growth. Meanwhile, sales of the novel AccuPoint Advanced NG handheld sanitation monitoring system drove a 16% increase in sales of the general sanitation product line. The company's Listeria Right Now 60-minute test system also saw a 13% increase versus the previous year.

The upside in the Food Safety business was also driven by strong growth across the company's diagnostics portfolio, which includes an increase of 12% in allergen test kits and an 11% increase in culture media.

Animal Safety revenues in the fiscal third quarter were $65.5 million, up 12% (9% organically) year over year. The upside can be attributed to strong growth in the veterinary instruments line (up 36%), which primarily includes needles and syringes, and the animal care line (up 12%), with strong growth in vitamin injectables and antibiotics. Further, Biosecurity products sold through the Animal Safety segment increased by 2%, driven by an 11% increase in insect control products and a 2% increase in sales of cleaners and disinfectants. This growth was partially offset by a 5% decline in sales of rodent control products, primarily due to difficult prior-year comparisons. 

Neogen Corporation Price, Consensus and EPS Surprise

Revenues from Neogen’s worldwide animal genomics business increased 10% in the fiscal third quarter on a year-over-year basis on the back of new sales resulting from Neogen's acquisition of Genetic Veterinary Sciences on December 9, 2021.

Revenues from Neogen’s international operations increased 10% in the third quarter of fiscal 2022. The company’s U.K. business gained 18% in pounds, driven by sales of cleaners and disinfectants to the U.K. and Asia.

Neogen’s revenues from China in the third quarter of fiscal 2022 decreased 17%, adversely affected by the country's "Zero COVID-19 strategy", which has led to large-scale commercial lockdowns and travel bans. Additionally, poor economic conditions for pork producers resulted in lower sales of cleaners and disinfectants. Meanwhile, Neogen’s Latin America business and its Brazilian operations were up 1% and down 2%, respectively, in local currency in the fiscal third quarter.

Margin Details

Neogen’s fiscal third-quarter gross profit increased 6.6% year over year to $57.4 million. However, gross margin contracted 137 basis points (bps) to 44.8%.

Sales and marketing expenses rose 14.9% to $21.5 million, whereas administrative expenses increased 65% from the prior-year quarter to $24.9 million. Research & development expenses were $4.6 million, up 7.7% from the year-ago quarter. Operating costs totaled $51 million, up 34% year over year.

In the reported quarter, operating income was $6.4 million, down 59.6% from the year-ago quarter’s level. Subsequently, operating margin contracted 854 bps to 4.9%.

Cash Position

The company exited the fiscal third quarter with cash and investments of $378.4 million, down from $381.1 million at the end of the fiscal second quarter. The company had no debt on the balance sheet at quarter end.

Our Take

Neogen exited the fiscal third quarter with lower-than-expected revenues and earnings. Neogen’s revenues from China in the third quarter of fiscal 2022 decreased 17%, adversely affected by the country's "Zero COVID-19 strategy". Escalating operating costs led to a contraction in operating margin, thereby building pressure on Neogen’s bottom line. On a positive note, Neogen top line increased year over year, driven by strength in the company’s Food Safety and Animal Safety segments. The Soleris product line and Megazyme acquisition contributed to growth in the Food Safety business. Meanwhile, strong growth in the veterinary instruments and animal care lines contributed to Animal Safety revenue growth. Revenues from Neogen’s international operations increased, driven by sales of cleaners and disinfectants to the U.K. and Asia.

Zacks Rank and Key Picks

Neogen currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader medical space are McKesson Corporation (MCK - Free Report) , AMN Healthcare Services, Inc. (AMN - Free Report) and Bio-Rad Laboratories, Inc. (BIO - Free Report) .

McKesson, carrying a Zacks Rank #2 (Buy), reported third-quarter fiscal 2022 adjusted earnings per share (EPS) of $6.15, which beat the Zacks Consensus Estimate of $5.38 by 14.3%.

McKesson has a long-term earnings growth rate of 11.8%. MCK has gained 56.6% compared with the industry’s 7.1% growth in the past year.

AMN Healthcare, flaunting a Zacks Rank #1, has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 37.2% versus the 53.3% industry decline.

Bio-Rad reported fourth-quarter 2021 adjusted EPS of $3.21, which surpassed the Zacks Consensus Estimate by 11.9%. It currently has a Zacks Rank #2.

Bio-Rad has an earnings yield of 2.3% versus the industry’s negative yield. BIO surpassed earnings estimates in the trailing four quarters, the average surprise being 66.9%.