Neogen (NEOG, Financial) is witnessing a downturn today after its third-quarter (February) earnings report was released this morning. Despite reporting a strong EPS upside, the revenue fell short of expectations. A significant concern for investors is the substantial downward revision of revenue guidance for FY24, indicating potential weakness in the fourth quarter (May).
The company's Food Safety segment, known for its diagnostic test kits for detecting food pathogens, spoilage, and allergens, saw a revenue increase of 4.1% year-over-year to $157.8 million. This growth was primarily due to the Indicator Testing, Culture Media & Other product category, with notable sales in Petrifilm. However, a decline in culture media sales slightly offset this growth.
Neogen's Animal Safety segment, which offers a range of products including veterinary instruments and vaccines, reported a 6.5% year-over-year sales increase to $71.1 million. This growth stemmed from its biosecurity product portfolio, buoyed by new business wins and heightened demand for cleaners, disinfectants, and insect control products.
The disappointing guidance is largely attributed to the aftermath of a Reverse Morris Trust transaction with 3M (MMM, Financial), which saw Neogen integrating 3M's food safety business. Despite progress, this integration has led to operational inefficiencies at Neogen's primary distribution facility, impacting order fulfillment rates and the company's ability to meet market demand consistently. However, Neogen remains optimistic that these challenges are temporary.
On a positive note, Neogen is witnessing favorable trends in its end markets. The Food Safety segment is seeing a sequential improvement in unit production volumes, while the Animal Safety segment has seen channel inventories normalize after several quarters. The company's current focus is on enhancing order fulfillment rates to align with the improving market demand.
Investors might have anticipated some challenges following the 3M integration, but the extent of the downward guidance has taken many by surprise. Fortunately, the issue seems to stem from operational inefficiencies rather than a lack of demand, suggesting the possibility of resolution over time. Nevertheless, the market's reaction suggests a cautious stance, with concerns that these problems could extend into FY25.
