Neogen (NEOG) stock climbed 1.0 % this morning. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Neogen's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.
Neogen Corporation, together with its subsidiaries, engages in the development, manufacture, and marketing of various products and services dedicated to food and animal safety worldwide. The mid-cap Health Care company is based in Lansing, United States and has 2,640 full time employees.
NEOG Has a Higher P/E Ratio Than the Sector Average
Compared to the Health Care sector's average of 24.45, Neogen has a trailing twelve month price to earnings (P/E) ratio of -180.3 and an expected P/E ratio of 28.9. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-0.12 or forward earnings per share of $0.75.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Neogen's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.
Neogen Is Overvalued in Terms of Expected Growth
Neogen's PEG ratio is 3.36. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Neogen's case, it tells us the company is overvalued.
NEOG Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Neogen, the P/B value is 1.49 while the average for the Health Care sector is 4.16.
NEOG's Weak Cash Flow Generation Is Troubling
The table below shows that Neogen is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Neogen's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 277371029.8%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:
|Date Reported||Cash Flow from Operations ($ k)||Capital expenditures ($ k)||Free Cash Flow ($ k)||YoY Growth (%)|
Neogen's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Neogen's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Neogen's Gross Margins
|Date Reported||Revenue ($ k)||Cost of Revenue ($ k)||Gross Margins (%)||YoY Growth (%)|
Neogen's Operating Margins
|Date Reported||Total Revenue ($ k)||Operating Expenses ($ k)||Operating Margins (%)||YoY Growth (%)|
Neogen's cost of revenue is growing at a rate of -0.0% in contrast to -17.9% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.0 and the average operating margins growth rate is -7.7, with coefficients of variability of 1.2% and 16.2% respectively.
We See Mixed Market Signals Regarding NEOG
Neogen has an average rating of buy and target prices ranging from $28.0 to $24.0. At its current price of $21.64, the company is trading -16.77% away from its target price of $26.0. 7.5% of the company's shares are linked to short positions, and 102.8% of the shares are owned by institutional investors.
|2022-12-31||Norges Bank Investment Management||9%||18,400,920||$398,195,897|
|2023-06-30||Vanguard Group Inc||8%||18,199,795||$393,843,552|
|2023-06-30||Wasatch Advisors LP||5%||11,864,374||$256,745,046|
|2023-06-30||Select Equity Group, Inc.||4%||9,721,752||$210,378,707|
|2023-06-30||State Street Corporation||4%||7,780,439||$168,368,695|
|2023-06-30||Conestoga Capital Advisors, LLC||3%||6,932,956||$150,029,163|
|2023-06-30||King Luther Capital Management||3%||5,815,212||$125,841,184|