Omega Protein: Why This $6 Stock Could Be A Takeover Target And Worth Double

| About: Omega Protein (OME)

Omega Protein Corporation (NYSE:OME) is focused on manufacturing and marketing nutritional products such as Omega-3 fish oil, which is harvested along the Atlantic and Gulf coasts. It supplies these products for use by livestock and equine feed manufacturers, as well as for human food manufacturers. The fish oils it produces are also used as plant food and in aquaculture.

Omega Protein has a unique ability to control quality because it owns the fishing vessels, the processing centers and warehouses. This allows it to monitor the entire process, which helps to ensure product integrity. This company has a strong balance sheet with about $40.6 million in cash and around $28.48 million in debt. It has annual revenue of around $225 million and a market capitalization of just about $127 million. Downside risks seem limited at the current stock price of just over $6 per share, but management execution, potential product liability or quality control issues and competitive threats are worth considering. However, the company has a history of successfully heading off these potential challenges.

This stock looks undervalued when considering a number of metrics. It trades well below book value, which is around $10.46 per share. It trades for about 9 times earnings, which is well below the industry average. However, there might even be a more compelling reason to invest in this stock, and that could be for the takeover potential.

Larger companies have been acquiring smaller companies that offer health and nutritional products. In fact, German healthcare giant "Bayer" agreed to buy Schiff Nutrition International (SHF) in a deal valued at $1.1 billion. Schiff makes Omega-3 products under the "Mega Red" brand, as well as other nutritional products. This deal values the company at about 18 times earnings. But shortly thereafter this announcement, another bidder came out and offered to buy Schiff Nutrition for $42, or roughly 22 times earnings.

At this price-to-earnings multiple, Omega Protein shares would be worth about $14 or more than double the current share price. Omega Protein could also be an attractive takeover target from a private equity firm or a healthcare and nutritional company. Either way, the shares look cheap and appear to have significant upside potential based on current industry valuations.

Here are some key points for OME:
Current share price: $6.45
The 52-week range is $5.88 to $9.24
Earnings estimates for fiscal year 2012: 52 cents per share
Earnings estimates for fiscal year 2013: 57 cents per share
Annual dividend: none

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.