Omega Protein Diversifies In Nutritionals, But Draws Short-Term Doubts
This article was originally published in The Tan Sheet
Executive Summary
Omega Protein acquired Cyvex Nutrition and InCon Processing in the past 15 months to enter the dietary supplement market and vertically integrate its omega-3 fish oil supply chain. The firm gained from a one-time settlement payment in 2011, but saw underlying earnings fall.
[Omega Protein Corp.]’s chief executive says the fish oil and fish meal producer is on the right track with moves to diversify into human nutritionals and vertically integrate its supply chain, but some analysts question the firm’s short-term financial decision-making.
In the past 15 months, the Houston-based company acquired ingredient developer Cyvex Nutrition Inc. to enter the dietary supplement market and InCon Processing LLC, whose Illinois distillation facility gave Omega Protein the final link in its omega-3 fish oil processing chain.
The acquisitions were meant to help boost Omega Protein’s margins, given that the firm’s bottom line remains highly dependent on volatile variables – its fish catch and the market price for fish meal, which comprises 76% of its business.
But Omega Protein’s gross margin dropped from 29% in 2010 to 23% in 2011, eliciting criticism during its full-year earnings call March 9. Analyst Timothy Ramey of D.A. Davidson & Co. was especially vocal in accusing the Houston-based company of glossing over an underwhelming year and squandering a record fish catch.
Omega Protein CEO Bret Scholtes
Photo courtesy of Omega Protein
Revenue climbed 40.3% to $235.2 million and net income was up 87% to $34.2 million in 2011. But income for the year included a $26.2 million settlement with the Gulf Coast Claims Facility established by BP for businesses affected by the Deepwater Horizon oil well blowout. Without that one-time pre-tax payment, Omega Protein’s adjusted year-over-year earnings before interest, taxes, depreciation and amortization contracted 1.6% to $45.4 million.
In a same-day research note, Ramey highlighted the company’s fourth-quarter earnings per share, which plummeted to 8 cents from 44 cents in the year-ago period. The analyst also slammed Omega Protein’s leaders for increasing their compensation while the firm’s market price hovers around $8 a share after clearing $14 about a year ago.
“Despite the EPS collapse, management seems to be taking a victory lap – counting the one-time settlement of the GCCF in their bonuses, which were up $3.2 million in 2011,” Ramey said.
Made In The U.S.A.
Omega Protein CEO Bret Scholtes defended the firm’s progress during 2011, noting it made strategic long-term gains in spite of a glut in the fish meal market that dragged down prices.
“I regret that the stock price is not higher, but we're trying to manage what we can control around here,” he said. “I think that we made positive steps during the year.”
Adding Cyvex was one such step. Scholtes pointed out that, before the acquisition, Omega Protein had struggled to break into the omega-3 fish oil supplement space using third-party brokers. Fish oil now makes up 15% of Omega Protein’s business and specialty nutraceutical ingredients comprise 5%.
Cyvex generated 2011 sales of $13 million, compared to $12 million in 2010, and had a full-year gross margin of 40%. Omega Protein acquired the Irvine, Calif., ingredient company in December 2010 for $11.1 million (Also see "News In Brief" - Pink Sheet, 3 Jan, 2011.).
Cyvex took over Omega Protein’s OmegaPure food ingredient brand and last year launched the OmegaActiv omega-3 oil for formulation in supplements.
While Omega Protein still seeks functional food opportunities through OmegaPure and hopes to obtain generally recognized as safe status for other ingredients, Cyvex CEO Matthew Phillips says the firm’s human nutrition interests lie more in supplements than foods.
According to a 2011 analyst presentation, Omega Protein’s “blue chip customers” in the supplement space include [NBTY Inc.], Nutramax Laboratories Inc. and Shaklee Corp.
Though there is no shortage of omega-3 fish oil ingredients already on the market, Phillips said OmegaActiv offers points of differentiation. For one, Omega Protein has full control of the product, from catching the Atlantic menhaden to refining the oil in Virginia and distilling it at InCon’s facility in Illinois.
“Our value proposition on the market is, it’s made in the U.S.A.,” he said in an interview.
OmegaActiv, in addition to the typical long-chain eicosapentaenoic and docosahexaenoic fatty acids, also contains docosapentaenoic acid, a precursor to DHA. Phillips said Cyvex is working to increase the concentration of DPA in OmegaActiv and sponsoring an animal trial at Texas A&M University to evaluate the ingredient’s benefits on heart and brain health, with a human trial tentatively slated for the second half of 2012.
Cyvex also has invested in a clinical trial to test the weight-management benefits of SolaThin, a protein ingredient derived from potato starch that Cyvex licenses from the Dutch company Avebe Group.