Presented by Eastern Michigan University

Anna Lazarenko, Byunghoon Park, Hassan Unis

Stephen Furey, Yeini Jo

Recommendation:
+

$41.00 current market

price (November 21 2014)

$38.00 using DCF Model,

50% weight

$44.00 using a P/E

Multiple Valuation, 50%
weight

$43.00 12-Month Target

Price

HOLD
50.00

45.00

40.00

5%
upside

35.00

30.00

25.00
11/02/12

05/02/13
Neogen Corporation

Recommendation

11/02/13
Current Price
(Nov. 21, 2014)

Investment
Summary

05/02/14

11/02/14

12 Month Target Price

Industry
Overview

Financial
Analysis

Valuation

Signs Point to HOLD

+Growing faster in lower margin segment

+Acquisitions slowing
+Expanding into emerging markets
+Defensive growth stock

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Segment Operating Margin As a % of Total Operating Margin

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%
2012

2013

2014

2015E

Food Safety (OM 24%)

Recommendation

Investment
Summary

2016E

2017E

2018E

2019E

Animal Safety (OM 14%)

Industry
Overview

Financial
Analysis

Valuation

Revenue vs Operating Income Growth

240%

220%

200%

180%

160%

140%

120%

100%
2010

2011

2012

2013

Revenue

Recommendation

Investment
Summary

2014

2015E

2016E

Operating Income

Industry
Overview

Financial
Analysis

Valuation

2017E

Signs Point to HOLD

+Growing faster in lower margin segment

+Acquisitions slowing
+Expanding into emerging markets
+Defensive growth stock

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Acquisitions:
+ 27 acquisitions since 2000

Revenue Growth
25.00%

+ All accretive within 1 year

20.00%
15.00%

+ Accounted for 23-29% of

10.00%

growth

5.00%
0.00%
2011

2012

2013

2014

2015E 2016E 2017E 2018E 2019E

Growth from Acquisitions

Recommendation

+ Less acquisitions in the

Organic Growth

Investment
Summary

Industry
Overview

future

Financial
Analysis

Valuation

Signs Point to HOLD

+Growing faster in lower margin segment

+Acquisitions slowing
+Expanding into emerging markets
+Defensive growth stock

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Signs Point to HOLD

+Growing faster in lower margin segment

+Acquisitions slowing
+Expanding into emerging markets
+Defensive growth stock

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Industry Overview: Drivers

+Increased Government Regulation
+FDA Food Safety Modernization Act
(FSMA)
+International Expansion
+Government regulation increasing in
China
+ China Food Safety Law
+Growing middle class in emerging markets
+Increasing demand for meat
Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Developed Countries Meat Consumption per capita, kg

100

1%
decrease

90

80

1%
decrease

70

60

50

40

30

20

10

2012

2022E

2012

United States

Recommendation

Investment
Summary

2022E
European Union

Industry
Overview

Financial
Analysis

Valuation

Emerging Markets Meat Consumption per capita, kg

100

9% growth
90

80

70

17% growth

60

50

40

30

20

24% growth
10

2012

2022E
Brazil

Recommendation

2012

2022E

2012

China

Investment
Summary

Industry
Overview

2022E
India

Financial
Analysis

Valuation

Industry Overview:
NEOGEN

IDEXX

Avg. INDUSTRY
(Diagnostic)

Market
Capitalization

$1.54B

$7.08B

$11.00B

Price / Earnings

49.72

30.57

20.64

17.54%

19.40%

20.00%

Operating
Margin

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Industry Overview:
Threat of New
Entrants

Historically high
profit margins will
attract new firms

Bargaining
Power or
Suppliers
5
4

Bargaining
Power of
Buyers

Threat of
new entrants

2
1

Intensity of Rivalry

Intensity of
Rivalry

Recommendation

Strong amongst
large firms and
small companies

Threat of
Substitute
Products

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Financial Analysis:

+Growing faster in animal safety segment

+Food Safety, 24% operating margin
+Animal Safety, 14% operating margin
+Revenue growth
+15% past four years
+12% forecasted growth
+Acquisitions slowing
Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Financial Analysis:

+Increasing sales force and new marketing

department
+8% increase from FY13 to FY14
+R&D driving future revenue
+Accounts for 33% of growth historically
+Will become largest growth factor
+Ample cash and debt free balance sheet
Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Financial Analysis:
390%

340%

290%

240%

190%

140%

90%
11/20/09

05/20/10

11/20/10

NASDAQ Health Care

Recommendation

05/20/11

11/20/11

Neogen Corporation

Investment
Summary

05/20/12

11/20/12

05/20/13

IDEXX Laboratories, Inc.

Industry
Overview

Financial
Analysis

11/20/13

05/20/14

NASDAQ Composite

Valuation

Discounted Cash Flow

Assumptions:
3%

Animal
Safety
Growth

8% (14% OM)

1.0

Food Safety
Growth

4% (24% OM)

Market Risk
Premium

3.5%

Total Growth

12%

WACC

6.3%

Terminal
Growth

Risk Free
Rate

Beta

Recommendation

Investment
Summary

Industry
Overview

3%

Financial
Analysis

Valuation

Valuation: DCF Summary

Valuation to Common Equity (in thousands)

2015E

Net Income

2016E

2017E

2018E

2019E

Terminal Year

$30,139

$34,009

$38,166

$42,608

$47,325

135143

(6,198)

(6,416)

(6,650)

(6,900)

(7,166)

(12,131)

8,868

8,135

9,160

10,122

10,999

(3,380)

(11,232)

(11,842)

(12,467)

(13,101)

(13,737)

(17,673)

Free Cash Flow to Common Equity

3,842

7,616

9,890

12,485

15,423

108,718

Present Value of FCF

3,613

6,735

8,224

9,763

11,341

29,892

D&A
Change in NWC
CAPEX

Value Attributable to Common Equity

1,400,305

Equivalent Shares at Valuation Date

36,734

Forecast Price/Share

$38.12

$38.00

Assumptions
2015 Growth Rate

12.00%

Terminal Growth Rate

3.00%

WACC

6.34%

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Valuation: Sensitivity Analysis

Operating Margin

10

Recommendation

Sales Growth
11
12
13

14

9 31.33

33.5

35.86

38.4

41.23

10 32.25

34.47

36.89

39.52

42.38

11 33.02

35.28

37.74

40.42

43.33

12 34.05

36.36

38.88

41.62

44.6

13 34.91

37.27

39.84

42.63

45.67

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation

Valuation: P/E Multiple

P/E Multiple Valuation

Feb 14

May 14

$0.22

$0.23

Aug 14

Nov 14

$0.20

$0.18

P/E Ratio
Price

Recommendation

Investment
Summary

Industry
Overview

Total EPS
$0.83

53.53
$44.43

Financial
Analysis

Valuation

Valuation: Summary
DCF
$38.00
50%

$41.00
P/E Mult.
$44.00
50%

Recommendation

Investment
Summary

Industry
Overview

Financial
Analysis

Valuation