Is Neogen Corporation (NEOG) an Attractive Investment?
Baron Funds, an investment management company, released its “Baron Growth Fund” second quarter 2023 investor letter. A copy of the same can be downloaded here. In the second quarter, the fund rose 2.71% (Institutional Shares) compared to the primary benchmark the Russell 2000 Growth Index’s 7.05% return and the S&P 500 Index’s 8.74% return. Year-to-date, the fund gained 10.81% trailing the Benchmark by 2.74%. In addition, please check the fund’s top five holdings to know its best picks in 2023.
Baron Growth Fund highlighted stocks like Neogen Corporation (NASDAQ:NEOG) in the second quarter 2023 investor letter. Headquartered in Lansing, Michigan, Neogen Corporation (NASDAQ:NEOG) develops and manufactures products for food and animal safety. On September 5, 2023, Neogen Corporation (NASDAQ:NEOG) stock closed at $22.00 per share. One-month return of Neogen Corporation (NASDAQ:NEOG) was -1.21%, and its shares gained 23.94% of their value over the last 52 weeks. Neogen Corporation (NASDAQ:NEOG) has a market capitalization of $4.759 billion.
Baron Growth Fund made the following comment about Neogen Corporation (NASDAQ:NEOG) in its Q2 2023 investor letter:
"We also added to our investment in Neogen Corporation (NASDAQ:NEOG), a pure-play food security company. We have been investing in Neogen since 2009 and opportunistically added to our position as short-term merger integration challenges depressed the stock price. Neogen announced the acquisition of 3M Food Safety in 2022. We view this acquisition as a transformational deal that creates a scaled food security leader with a broad product portfolio and increased capacity to drive future innovation. The 3M Food Safety business was underfunded and undermanaged by its prior owner but will benefit from enhanced focus and capital allocation by Neogen management. Recent financial results have exposed several areas of weakness in 3M’s Petrifilm production and fulfillment processes, which have temporarily reduced Petrifilm’s earnings. We expect this situation to gradually improve over the year and be fully resolved when Petrifilm manufacturing is transferred to Neogen’s facilities.
Once the integration is complete, we expect Neogen to compound its revenue at a high single-digit rate organically. The company serves an addressable market that exceeds $20 billion of annual recurring revenue, or more than 20 times larger than its business. The food security market is growing at a mid-single rate annually, driven by durable secular trends including more incidents of food contamination, rising incomes in emerging markets, more health-conscious consumers, increasing food allergies, and an increasing focus from regulators. Beyond organic growth, the company has a muti-decade long track record of making successful bolt-on acquisitions, which we expect will continue.
The company derives around 95% of its revenue from consumable products. Revenue tends to be recurring in nature. Neogen also boasts strong customer retention rates as its products often become deeply embedded in daily workflows. The ongoing 3M Food Safety merger integration will distort near-term profitability, but we expect adjusted EBITDA margins to reach 30% over the next few years, with correspondingly strong free-cash-flow generation. Once the merger integration is finished, Neogen will be a steady mid-teens earnings compounder, which we expect will drive strong compounded stock returns over a multi-year period."
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Neogen Corporation (NASDAQ:NEOG) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 13 hedge fund portfolios held Neogen Corporation (NASDAQ:NEOG) at the end of second quarter which was 20 in the previous quarter.
We discussed Neogen Corporation (NASDAQ:NEOG) in another article and shared Conestoga Small Cap Strategy's views on the company in the previous quarter. In addition, please check out our hedge fund investor letters Q2 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
