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Neogen Lags Q1 Earnings, Revenue Estimates; Shares Down

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Shares of Neogen Corp. (NEOG - Free Report) plunged 8.9% ($4.83) to close at $49.36 yesterday, following the company’s first-quarter fiscal 2016 results, which lagged expectations. Earnings per share (EPS) of 25 cents missed the Zacks Consensus Estimate by a penny, while revenues of $74.9 million fell short of the Zacks Consensus Estimate of $76 million.

On a year-over-year basis, EPS increased 4.2% on the back of 10.7% revenue growth which was primarily driven by double-digit growth at the Food and Animal Safety segments. However, the company continues to face foreign exchange headwinds which impacted the top line by $2.2 million and the bottom line by 2 cents.



Segment Details

Revenues from Neogen’s Food Safety business increased 11.3% to $34.5 million, primarily because of improved performance by the company’s allergen product line.

Sales of Neogen's general microbiology products increased 65% on a year-over-year basis, primarily due to the acquisition of BioLumix, completed in 2014. Sales of consumable Soleris vials to detect microorganisms in food, nutraceuticals and other consumer items, increased 24%. Overall organic growth for the Food Safety segment stood at 7% in the reported quarter.

Sales of the rapid test for mycotoxins (mold toxins primarily found in grains) increased 12% in the reported quarter, with sales for test kits rising for each of the six major mycotoxins. Revenues from the company's rapid tests for food allergens, such as gluten and peanuts, rose 17%. Sales of general sanitation diagnostics, inclusive of the recently launched AccuPoint Advanced ATP Hygiene Monitoring System, improved 12%.

Revenues from the Animal Safety business increased about 10.3% on a year-over-year basis to $40.4 million. Sales of the Neogen's rodenticides increased 9%. Sales of small animal supplements surged 53% in the current year when compared to the prior year, fueled by increased demand for supplements used for thyroid hormone replacement therapy in dogs.

Revenues from GeneSeek veterinary genomic operations increased about 12%, on the back of higher market share for the company’s proprietary genomic products and new poultry business.

Operational Details

Gross profit increased 10.9% on a year-over-year basis to $37.8 million, primarily owing to higher revenues. Gross margin expanded 10 basis points (bps) basis to 50.5%.

Total operating expense increased almost 11% on a year-over-year basis to $22.9 million. Sales and marketing expenses climbed 11.1% to $13.6 million because of higher personnel-related expenditures along with increased shipping costs as well as advertising and tradeshow expenses.

Research & development expenses increased 7% to $2.6 million primarily due to management’s continued investments in new product development and enhancement of its existing products.

General and administrative expenses rose 12.3%, primarily due to increased compensation in fringe cost, and depreciation on infrastructure investments made in the past couple of years.

Operating income increased 10.8% to $14.9 million. Operating margin, however, remained unchanged on a year-over-year basis at 19.9%.

Neogen had cash and investments of nearly $111 million as of Aug 31, 2015, down from $114.2 million as of May 31, 2015.

Our Take

Neogen’s first-quarter fiscal 2016 results have clearly disappointed investors, as reflected by the price fall. Unfavorable foreign exchange rate continues to be a major concern.

However, we feel that an increasing global footprint, the recent partnership with Illumina (ILMN - Free Report) , formation of new rules by the Food Safety Modernization Act ("FSMA"), and healthy demand for rodenticides are key growth catalysts.

Zacks Rank & Key Picks

Currently, Neogen carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector include Masimo (MASI - Free Report) and Thoratec , both of which sport a Zacks Rank #1 (Strong Buy).

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