Omega Protein: Continuing The Transformation

May.14.13 | About: Omega Protein (OME)

Omega Protein (NYSE:OME) is a company I reviewed and recommended back in December of last year, with a strong buy recommendation and with a forward 12 month target price of at least $12 a share (please consider: Should Fish Oil And Fatty Acids Be Part Of Your Portfolio?). At the time of my recommendation the stock was $6 a share.

Key highlights of the company's Q1 2013 results are as follows:

First Quarter 2013 Highlights

  • Revenues: $48.9 million for the quarter, compared to $63.1 million in the 2012 fourth quarter and $41.1 million in the 2012 first quarter

  • Gross profit margin: 24.7% for the quarter, an increase from 20.5% in the 2012 fourth quarter and 21.6% in the 2012 first quarter

  • Net income/loss: Net income of $2.8 million for the quarter, compared to a net loss of $0.5 million in the 2012 fourth quarter and net income of $1.8 million in the 2012 first quarter

  • Earnings: Earnings per diluted share of $0.14 for the quarter, compared to a loss per diluted share of $0.03 in the 2012 fourth quarter and earnings per diluted share of $0.09 in the 2012 first quarter

  • Adjusted EBITDA: $10.0 million for the quarter, compared to $11.6 million in the 2012 fourth quarter and $7.2 million the 2012 first quarter

The lower q-o-q revenues were primarily impacted by a $15.8 million decrease in animal nutrition revenues, which reflected lower fish meal sales volumes of 47% and lower fish oil sales prices of 14%, partially offset by higher fish meal sales prices of 7% and higher fish oil sales volumes of 116%.

Main driver and catalyst for higher prices

1) Acquisitions

Initially my recommendation had to do with the compelling valuation of the company. But as I analyzed this company more, I realized it was producing large amounts of free cash flows that it then used for acquisitions.

Acquisitions are the key, for they are providing the company the ability to enter a much higher gross margin business, the human nutrition business. The company has made several acquisitions over the past 2 years that are slowly transforming the company's profit and product mix.

The company recently acquired Wisconsin Specialty Protein that produces a variety of value-added protein ingredients for the food and nutritional supplement industries, including organic and other specialty protein products, in an all cash transaction of $26.5 million. The business recorded revenues of $11.5 million in 2012 and revenues grew 17% over 2011 while EBITDA grew 73% from 2011. Please note all acquisitions over the past 2 year have been done on an all cash consideration.

2) Analysts are very bullish

According to Thomson First Call, analysts have a mean price target of $14.5 for the company's stock with three strong buy recommendations. That's even higher than my 2013 $12 price target.

3) Key statistics

The stock is trading currently at a P/B ratio of 1 and price/sales of 0.88. The current trailing P/E is 42, but the forward P/E is around 10. The market is expecting a big rise in after tax profits and if the company continues with its acquisition strategy, I think these figures might be revised upwards.

4) Technical picture

On a technical note, if the stock closes near the $11 level, then technical resistance levels will have been taken out and from a pure technical prospective, the stock should see higher levels.

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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.