Can Wynnefield Capital Unlock Value in Omega Protein?

 | May 04, 2016 | 12:00 PM EDT
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There is some interesting activist involvement developing in Omega Protein (OME), one of the more interesting small-cap names you'll ever hear about, given the business the company operates in. Activist Wynnefield Capital, which holds a 7.9% stake, is giving voice to concerns over capital allocation, and could change the course of this small-cap in the fish oil industry.

Omega is, in fact, the leading provider of fish oil, fish meal, and organic fish solubles in the U.S. These products are primarily used for dietary supplements (Omega 3), as well as animal feed.

More interesting is the source of the company's products: a small, oily fish whose proper name is Menhaden. More commonly known in some areas of the country as a bunker fish, it's only other use (in my experience, anyway) is as crab bait. The company nets the fish in the Chesapeake Bay, Gulf of Mexico, and other areas.

This is a name I've owned in the past, and during that time, there always seemed to be one potential issue or another threatening the company. Hurricane Sandy wreaked havoc on one of the company's processing plants, as I recall, and harvest limits for Menhaden fishing in the Chesapeake Bay and other areas were seen as a threat to the company's business. More recently, in 2014, an explosion at one of the company's processing plants killed one person and injured three others. The prices realized for fish oil and fish meal are another wildcard.

Through it all, though, the company has lived to tell the tale. Limits on Menhaden fishing have not seemed to impact the company's business - so far, anyway. Revenue grew 16% last year - to $359 million. In fact, it has grown at around 15% annually over the past five years. Net profit margins vary widely from year to year: last year's was 6.5%. Since 2011, it has been as high as 13.6% (2011) and as low as 1.7% (2012). The last unprofitable year was 2009.

The balance sheet reveals little cash, which is par for the course with this company. But it holds just $24 million in debt, which seems low - given the amount of company-owned assets. Omega owns six fish-processing plants, a health and science center, four warehouses, and a 49-acre shipyard. In addition, it owns a fleet of 37 boats, and 27 spotter aircraft.

What recently put Omega back in my sights is that an activist investor, Wynnefield Capital, took aim at the company. Last August, Wynnefield disclosed that it owned a 7.6% active stake in Omega, and recommended that the company consider selling itself. In March, Wynnefield nominated three candidates for Omega's board of directors. Then, last week, the activist disclosed an increase in its stake to 7.9%, and demanded that Omega set a date for its annual meeting. More specifically, Wynnefield believes that Omega has misallocated $168 million into its Human Nutrition business and that investors would be better served if Omega focused more on the higher-margin animal feed business.

While activist involvement does not always boost a company's fortunes (or investor's) there are many cases where it can be the catalyst needed to unlock value. If nothing else, these situations can be fascinating to follow.

While I am not ready to bite, Omega Protein is back on the radar.

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