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Neogen Corporation: Initiation of Research Coverage

Thursday, June 5, 2014

William Blair & Company initiated research coverage of Neogen Corporation (NEOG $36.97), a diversified food and animal safety company, with a Market Perform rating and Core Growth company profile.

Analyst Brian Weinstein estimated that the company would generate earnings per share of $0.77 in 2014 and $0.92 in 2015.

“Neogen targets two related markets—food safety and animal safety—that we estimate total an annual opportunity of $1.9 billion and where the company has clear leadership positions,” Weinstein said. “Food safety is a $950 million-plus market growing at 8%-10% per year. Neogen sells diagnostic kits and related products that detect harmful toxins, foodborne pathogens, allergens, and levels of general sanitation in areas where food is produced.”

 “The company also targets animal safety, also a $950 million-plus market growing at 5%-7%. Neogen provides hundreds of products, including rodenticides, insecticides, disinfectants, pharmaceuticals, vaccines, and other veterinary products, that aid in the control of rodents and disease as well as assist animal protein producers and farmers in the multitude of daily tasks required.”

Weinstein added, “Reimbursement headwinds have recently plagued diagnostic companies—like the rest of healthcare—and caused volatility in these stocks. Yet Neogen operates outside markets subject to reimbursement. In addition, increased regulation is actually beneficial to Neogen since it requires more testing to be done to safeguard the food supply.”

“The company’s proven record and seasoned management team, combined with increasing end-market demand from a growing worldwide population, rising middle class in emerging economies, and heightened food safety regulatory environments around the globe, gives us confidence that top-line growth will remain in the low double digits for several years and will support operating margins of roughly 20%,” he said. “Despite our positive view of the company, we simply cannot get past the valuation at this point and are therefore initiating coverage with a Market Perform rating.”

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