Omega Protein Takes a Dive

 | Nov 16, 2011 | 12:00 PM EST  | Comments
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In an October column, I wrote again about being intrigued by fish-oil and fishmeal producer Omega Protein (OME), a name that I'd owned in the past.

Omega has been volatile over the years for a variety of reasons, and trading action in the past week stands as another example of this volatility. Shares have fallen 31% in the past week, the result of a worse-than-expected quarter, as well as some news on the conservation front. I've been looking for an opportunity to pick up shares on the cheap, and this past week's drubbing provided that opportunity, so I am back in the name.

Of course, my presumption is that there's been an overreaction to recent news. If I'm wrong about that, there may be further to fall, but I'm patient.

Last Thursday's third-quarter earnings release revealed that revenue rose 28.1% to $71.7 million, while net income fell 32% to $3.3 million, or $0.24 per share. While sales volumes were higher than last year, fish-oil yields were lower and gross profit margins fell to 19% from 27%. Earnings per share were well off consensus estimates of $0.45, although in Omega's case only three analysts cover the stock. The shares fell 21% last Wednesday, but the damage was not yet over.

On Nov. 9, the menhaden board of the Atlantic States Marine Fisheries Commission voted to cut the annual menhaden harvest by 37% (menhaden are the oily fish that Omega Protein harvests). This needs an additional vote to become effective, and if passed, it would not go into effect until 2013. Environmentalists believe that menhaden have been overfished, and limits will help to regrow the population. Although menhaden are not fit for human consumption, they are an important part of the food chain.

On the East Coast, Omega harvests Menhaden around Virginia and North Carolina. In Virginia, where the company operates a processing plant, the limits would need to be approved by Virginia lawmakers. Of course, the East Coast is not the only place where Omega fishes. The company has significant operations in the Gulf of Mexico, primarily off the coasts of Mississippi and Louisiana, where it deploys nearly three-quarters of its fleet of fishing vessels and more than 80% of its spotter aircraft during the April to October fishing season. These areas are not affected by the proposed limits.

Since the commission's ruling, Omega shares have fallen another 13%. While there is plenty weighing on this stock, the balance sheet remains solid. The company ended the third quarter with $51 million, or $2.63 per share, in cash and $31.5 million in debt, and it trades at just 0.78x tangible book value per share. While 2012 consensus earnings estimates of $1.32 per share put the forward price-to-earnings ratio at less than 6, that's not a number I can put too much faith in at this point. There are too many moving parts to this story.

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