The last time I wrote about fish-oil and fish-meal producer Omega Protein (OME), its stock was on fire, more than tripling between June 2010 and March 2011. Too much, too quickly, I thought. I owned the stock previously (both outright and through Zapata Corp., now Harbinger Group (HRG), which at one time owned nearly 60% of OME) because it was a fascinating story in a niche business. While I've made money with OME, which has a market capitalization of $191.4 million, fascinating stories don't always translate into great investments. In this case, it's about timing, weather and manmade disasters.
The Houston company's main products, omega-3 fish oil used as a dietary supplement and fish meal used in pig feed, are derived from a very oily fish called menhaden, more commonly known as "bunker." Omega Protein harvests menhaden in the Chesapeake Bay and the Gulf of Mexico. Spotter aircraft locate the fish, and then boats net them. It's a great use of a species not fit for human consumption in the traditional way, because omega-3 fish oil is said to increase "good" cholesterol, lower triglycerides and reduce inflammation, among other things.
But there are many risks involved in this business. Anything that affects the harvest -- bad weather, oil spills, and conservation efforts -- affects the company's bottom line. The pricing of fish oil and fish meal, which are commodities, also has an effect. That's why OME has had such a volatile run over the years.
I was scared out of the stock following last year's Gulf oil spill because I believed the hype that fishing in the area would take years to recover. That was a bad move. I lost sight of the fact that the company carries insurance for such disasters. The company filed claims following Hurricanes Katrina and Rita in 2005 for loss of inventory and damage to three of its four processing facilities. In the case of the oil spill, Omega received payments of $44.8 million from the Gulf Coast Claims Facility (CGCF) over the past 13 months.
Those payments are the reason that, on the surface, second-quarter results looked so good. Revenue grew 22% to $44.2 million and net income jumped more than tenfold to $22.9 million, or $1.14 per share. But that included $26.2 million in payments from the CGCF. So, this is the epitome of one-time events (at least I hope it is a one-time event). Excluding these payments, the company still beat the $0.24 consensus estimate, with earnings from continuing operations of $0.29 per share.
You have to be very cautious of the company's miniscule trailing price-to-earnings ratio of 4. Consensus estimates for 2012 net income of $1.34 per share, however, put the forward PE at just over 7. That's cheap but, as I've demonstrated, there is a lot that can go wrong.
I am much more intrigued by the shares this afternoon at $9.88 than I was when they were above $14 in April. The company ended the second quarter with $2.45 per share in cash on the books, and currently trades at just 1.03x tangible book value. There may be opportunities to pick up shares cheaper if there are any more volatile down days in the market. OME tends to get battered under those conditions, as evidenced by a 12.5% plunge Oct. 3.