OME - Omega Protein

[SpecOps]

Came across this company in a screener today.

 

For more than 100 years, Omega Protein has delivered quality ingredients that improve the nutritional integrity of food, supplements and animal feed to allow consumers and their families to live healthier lives with better nutrition.

Omega Protein provides the food and supplement industry with some of the most trusted, scientifically-recognized, and innovative ingredients in the marketplace. Protein, omega-3 fatty acids, and antioxidants can be added to functional foods to improve the nutritional integrity of products such as bakery or dairy foods. These essential nutrients are also added to supplements for consumers who struggle to get the recommended amount of nutrients throughout the day through regular diet.

At Omega Protein, we strive to be a respected leader in every market we serve by providing customers with premium, sustainable products.

 

EV of $250m, net profit is $20-30m in a decent year. Generates good FCF in good years too.

 

Occasionally have bad years because the fishing yields are bad, which happened in 2012 and has happened again in the last quarter.

 

Anyone looked at this company in detail?

[JayGatsby]

Anybody looked at this recently / know anything about it?

1. Company is a vertically integrated producer of fishmeal and fish oil. Their fishing permits give them something like 85-90% of the menhaden catch in the US, which they then turn into fishmeal. This sounds good, but as far as I can tell they're still a price taker because it's a global business with some large players internationally (Peru is largest producer). [sidebar: Eric Schleien's podcast has an interesting interview with an angel investor who's investing in an alternative to fishmeal. #3 here: https://itunes.apple.com/us/podcast/the-intelligent-investing-podcast/id1205082419?mt=2 )

2. The "animal nutrition" product is used as animal feed for aquaculture and to boost the the content of Omega 3s. The theory is the demand for this is growing while the supply (small ocean born fish) isn't, resulting in higher prices over time. Randomly I bought milk yesterday at Kroger that had Omega 3 written on the front. I didn't think anything of it and assumed it was just from being grassfed, but when I got home I noticed that they'd actually mixed fish oil into the milk.

3. Company's capital allocation historically has been awful. To be a bit more stable (but also to grow the empire) the company has been investing heavily into "human nutrition" through acquisitions and operating losses. The human side loses money while having ~$125M of net working capital. They also have a $40M share repurchase authorization outstanding (market cap: $430M, cash: $37M, debt: $1M), which has been outstanding for about a year without a single share repurchased. Lastly, they recently implemented a small dividend, which given the valuation doesn't make a lot of sense on face.

4. Wynnefield Capital led a proxy battle last year and won two board seats with ~80% of the vote. The company is doing a strategic review of the business. They did this once before and decided not to change anything. Potentially with Wynnefield's involvement they're a bit more critical. Management doesn't own much, so the 80% vote is a pretty strong hammer if Wynnefield didn't like the result and wanted to launch a multi year proxy fight. I don't know a lot about Wynnefield. They're on the board of another company I'm in (TWOC) where personally I didn't think the capital allocation was great, but the company made some longer term investments so we'll see.

5. If you take the numbers above and assume they dispose of the human side at $125M and use the proceeds plus the $40M to repurchase shares you have a market cap of $265. Last year the company did ~$55M of operating profit pre-tax, with a $15M loss coming from human. If you add that back you're at $70M of pre-tax earnings (say $45 tax adjusted.. they're a tax payer). So a PE of ~6. Tangible book value per share is $13. Shares are $19 now so if you assume the downside is ~$13 (inventory, boats, factories) and the upside is say $40 (PE of 12 with consistent earnings) it's a pretty good risk/reward.

6. That assumes the company does all the right things and the commodity prices hold. Prices are down so far this year: http://www.indexmundi.com/commodities/?commodity=fish-meal&months=120

7. The company has also been subject to a few Clean Water Act violations and recently disclosed a subpoena related a whistleblower violation. The risk here possibly is it seems like their business is dependent on the government giving them a quota to fish so if they manage to spoil that it could really harm the business.