CFA Institute Research Challenge

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Eastern Michigan University Student Research

Healthcare Sector, Diagnostic Substances Industry

NEOGEN CORPORATION
Date: November 21st, 2014

Current Price: $41.47

Exchange/Symbol: NASDAQ/NEOG

Target Price: $41.26

Recommendation: HOLD

Highlights
We issue a HOLD recommendation. Using a Discounted Cash Flow Valuation and a
Price-to-Earnings Multiple Valuation, each given equal weight, the one year target
price of $41.26 was determined. This reflects the current stock price of $41.47. Our
valuation was based on the following factors:
Market Profile

A defensive stock with slowing growth opportunities

52 Week Range:

$35.50-50.82

Avg. Daily Volume:

158K

As % of Shares
Outstanding

0.43%

Shares Outstanding:

36.96M

Market Cap:

$1.77B

Institutional
Holdings:

84%

Beta:

1.04

Source: Yahoo Finance

Neogen is characteristically a defensive stock because contrary to the majority, Neogen prospers from increasing government regulation. From the farm to the plate,
governments are requiring higher standards for food, thus increasing the demand for
the diagnostic test kits and other products that Neogen offers. The Industry NEOG is a
part of will continue to grow for many years however, Neogens most significant factor in growth, acquisitions, will slow as suitable acquisition targets will appear less
frequently in the future.
Greatest opportunities outside of United States
Domestically, the food and animal safety market in the United States are already
heavily regulated. Countries such as Brazil, China, and India all have extremely large
populations, and lack much of the regulation that the United States and Europe have
in food and animal safety. As the middle class grows in these emerging markets, the
people and governments will require higher quality foods. This will increase the demand for Neogens diagnostic test kits, and other products.
Ample of cash and no debt, ever

Valuation
DCF

P/E
Multiple

Price

$38.10

$44.4

Neogen has a very strong balance sheet. Ample cash, no debt. They maintain a very
high cash balance to seize acquisition opportunities as they arise. The company has
never carried any debt. The capital structure of the company could change if an opportunity presented itself that required financing.

Weights

50%

50%

Growing in the wrong places

Target
Price

$41.26
Source: Team Estimates

Neogen is split into two segments, animal safety and food safety, accounting for 53%
and 47% of revenue, respectively. Growth is taking place much quicker within the
animal safety segment compared to
Revenue growth by segment
the food safety segment. The prob300%
lem with this is that Neogen is grow250%
ing its lower operating margin seg200%
ment faster. Animal safety had an
operating margin of 14% in FY14
150%
whereas the food safety boasted an
100%
2010
2011
2012
2013
2014
2015
operating margin of 24% in FY14. As
Animal Safety Operating Income
this continues, Neogens margins will
Food Safety Operating Income
worsen.

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Business Description

Figure 1: % of Total Revenue

Food
Safety
Animal
Safety

Source: SEC Filings

Overview
Neogen Corporation is an international food and animal safety company, which was
founded by Ted Doan and Jim Herbert in Lansing, Michigan in 1982. Neogens business is primarily divided into two segments, food safety and animal safety. The company currently has more than 200 diagnostic test kits available with complementary
products and services that they supply to the largest food producers and processors.
They are one of the few businesses that take advantage of government regulations
which has increased the demand of products in the food and animal safety field. Neogen also has a large presence domestically as well as operations in 110 different
countries.

Food safety segment

Neogens food safety segment, which accounts for 47% of revenue (see Figure 1).
This segment creates diagnostic test kits that aim to detect contaminations in food
products. These test kits are sold to food manufacturers. The products in this segment are marketed to both human food and feed processors. Neogen differentiates
themselves in this segment by making test kits that are cheaper, easier to use, and
that provide results faster than their competitors. Despite its slower growth, the food
safety segment produces the highest operating margins.
Animal safety segment
Neogens animal safety segment brings in 53% of the total revenue (See Figure 1). It
develops and manufactures, and markets a line of pharmaceuticals, rodenticides, disinfectants, veterinary instruments and diagnostic products that are used worldwide
for animal safety. This segment has grow recently with the increased market share
taken in the veterinary supply market. The segment has a lower operating margin of
14% in FY14 however, it is growing at a much higher rate than the food safety segment. Expenses should be watched carefully here.
Managements strategy
Neogen strives to become a world leader in their niche market, food and animal safety. The company is currently pursuing four strategies to reach their vision. These
strategies are detailed below:
International sales expansionaccounting for about 2/3 of future growth, international sales are the largest opportunity for Neogen. The company has a strong presence in Europe through Neogen Europe, Ltd. as well as in Latin America with Neogen
Latinoamrico. Neogen do Brasil has been an incredible asset for the company since
Brazil is one of the largest exporters of many food commodities. Neogen also has a
presence in Shanghai and is currently exploring opportunities in India.
Synergistic acquisitionshave been the biggest growth driver for the company recently. Acquiring 26 companies since the year 2000, acquisitions account for roughly
half of the historical growth. Future acquisitions will be done at fair market value and
less frequently.
Expanding product linesthis is an important part of Neogens growth strategy. In
order to meet market demand they need to successfully research and develop new
products and bring them to the market at the right time.
Increasing sales of existing productsrecently Neogen has increased its sales force.
This will strengthen the companys ability to drive revenue.

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Industry Overview and Competitive Positioning

A small space within a larger industry
Neogen is grouped into the diagnostic substances industry however, they operate
within a niche market within that industry, food and animal safety. Demand in this
niche market is driven by government regulations that attempt to prevent food contamination. The Industry is made up of several larger companies as well as many
more single-shingle businesses that produce only one or two products. These small
companies have often been acquired by larger companies.
A unique business model brings few direct competitors
It is difficult to identify any single competitor for Neogen. However, there are many
competitors for the individual products that Neogen sells. IDEXX Labratories is Neogens closest competitor. IDEXX competes with several of Neogens products however, food and animal safety is only small part of a much larger IDEXX.

Figure 2: Key Ratios

Neogen
Market Cap $1.45B
P/E
Operating
Margin

IDEXX
$7.08B

49.72

30.57

17.54%

19.40

Source: FactSet

Neogen vs. Competition

Neogen has a much smaller market capitalization in comparison to the Industry and
its largest competitor IDEXX. This means that Neogen could be a potential acquisition
target for larger firms looking to enter a market with historically high profit margins.
Based on managements comments, there have been offers made to purchase Neogen. NEOGs P/E ratio is almost double IDEXXs P/E ratio and the Industry average.
Neogens P/E ratio is slightly overstated at 49.72 currently. This means that the company will have to either incrementally increase its earnings to live up to the high ranking or the stock price will need to fall in line with the Industry down the road. Neogens operating margin is less than the Industry average, which means Neogen is not
capable of generating operating returns as strong as its competitors. This is likely because they are growing their less profitable segment at a higher rate. Based on these
ratios (See Figure 2 and Appendix 4) we believe that Neogen is as of this report, appropriately valued and the stock price will continue to remain in line with the
NASDAQ Healthcare in the future.
Growth Drivers for the Industry:
Increased Government Regulations
This industry is a beneficiary of the stricter regulations at both the domestic and global levels. As regions adopt new regulations and consumers become more health conscious increased demand will arise within the diagnostic substances industry. The
FDA Food Safety Modernization Act (FSMA) was signed into law in 2011, which gives
the FDA the authority to regulate how food is grown, harvested, and processed. The
FSMA changes the FDAs plan of responding to food contamination, to one in which
food contamination can be prevented. The FSMA will continue to drive additional
revenue and research for the Industry. Increased regulations, will in turn bring new
competitors into the market to meet the new demand.
International Expansion
As the global middle class becomes larger, meats and higher quality foods are being
demanded by global citizens. As a direct result, countries like China, India, and Brazil
are currently adopting new plans to increase food and animal safety. In 2014, a final
draft of Chinas Food Safety Law (FSL) was created. The FSL will establish standards
for testing for contaminants, food additives, microorganisms, pesticides, as well as
animal drug residue in food. In addition, Chinas FSL will require manufacturers and

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producers to self-audit their products. This will create a demand for the products
that Neogen offers. These stricter regulations are coming as the population of China's
middle class continues to rise. Currently at 160 million, the population is projected to
be as high as 300 million by the year 2030. Chinas increasing middle class combined
with India's growing meat exporting industry has many analyst believing that the
global consumption could rise up to 80% by 2022 (See Figure 3 and Appendix 7). This
will directly increase demand for products in the food and animal safety industry. These are not the only regions that will increase market demand for Neogens
products. Countries such as the United Kingdom, Germany, France Netherlands,
Mexico and Brazil are all large consumers in this industry and will also increase demand as citizens require better quality foods.
Competitive Positioning
With a convincing domestic presence and its growing global presence, accounting for
38% of its revenue, Neogen is in a strong long term position. The potential for more
growth in the global market is high as Neogen is already positioned to be a player in
the Chinese market place. They are also creating plans to enter India as early as fiscal
year 2015. With the newly drafted regulations in China, demand should be higher
than it has been historically. Neogen will have an opportunity to capitalize and grow
its business in China in the coming years as regulations tighten.
Figure 3: Meat consumption per capita in 2022

Figure 4: Porters 5 Forces

Source: "Meat Atlas 2014: meat consumption developing countries" by Heinrich Boell Foundation

1 the lowest, 5 the highest

Source: Team Estimates

Porters Five Forces (1- the lowest, 5- the highest), (see Figure 4):
Threat of new entrants (5)
Because of the high profit in the food and animal safety market as well as growth in
the Industry there are several companies that are looking to enter the market. Many
companies that Neogen acquired are small start up companies that created one or
two products that could be a threat to Neogens product line. Neogen has also stated
that there have been proposals by other companies to acquire Neogen, reinforcing
the fact that larger companies are looking to move capital into a market with high
profit margins.

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Intensity of rivalry (5)

The markets in which Neogen competes are subject to rapid and substantial changes
in technology and are characterized by extensive research and development and intense competition. Many of the competitors have superior financial, technical, and
research and development assets compared to Neogen. It is important for Neogens
research and development team to always deliver products that meet the current
needs of the market.

INVESTMENT SUMMARY
All signs point to HOLD: Fundamentally and the valuation
We are issuing a HOLD recommendation for Neogen, with a target price of $41.26. A
price, indicative that Neogen is a safe place for capital to be allocated. Neogen has a
strong presence, domestically and in Europe, and is expanding its global presence into
emerging markets such as China, India, and Brazil. Neogen is a defensive growth
stock, which is protected by government regulations despite the market position. The
stock is inline with NASDAQ Healthcare sector with high end potential: gaining a higher return than the market.
A growth stock with defensive characteristics
Neogen is a growth stock because of the potential international market share it is positioned to captured in the coming years. Historically, growth has occurred domestically; largely through acquisitions with the help of research and development of new
products. However, acquisitions seem harder to come by for Neogens management
team, with only two acquisitions in the last twelve months. Fundamentally, NEOG is a
defensive stock because it sells products that governments and social pressure for
safer, higher quality foods have and will continue to create demand for.

Figure 5: P/E Ratios

70
60
50
40
30
20
10
0
2010

2011

2012

2013

2014

Source: NASDAQ

2015E

2016E

Valuation Methods Used

We used a Discounted Cash Flow (DCF) Valuation and a Price-to-Earnings (P/E) Multiple Valuation. Each method was weighted equally to derive a target price of $41.42.
Financial Position
Neogen has never carried debt on its balance sheet and in doing so became very liquid in nature. This has shaped Neogen to be a growth stock with defensive qualities,
creating exponential value for long term shareholders. The company also has a very
high P/E ratio which has been its strongest line of defense against acquisition. The P/
E ratio continues to climb however, it is forecasted to fall in the coming years (See
Figure 5).
Market outlook
The increasing domestic, European and Asian regulations on food and animal safety
have created a long lasting demand for diagnostic substances. As Neogen continues
to maintain high margins, despite growing fastest in the lower margin segment, new
competitors will arrive in the marketplace looking to earn a profit. This will result in
an increase of larger companies entering into the market.
Possible investment risks
Historically, Neogen has been highly dependent on acquisitions. If they are unable to
continue to successfully acquire companies it could significantly decelerate their
growth. Neogen leans heavily on food and animal safety regulation increasing, thus
creating a continually growing demand for their products. If the regulations do not

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get passed, the demand for NEOGs products will not be there. In addition, Neogens
greatest opportunity is in emerging markets, which will subject them to greater currency risk in the future. These risks will be further explained in the Investments Risks
section.

Valuation

Figure 6: Sales growth

Food Safety

8%

Animal Safety

4%

Total Growth

12%

Terminal Growth

3%

Source: Team Estimates

Figure 7: Calculating WACC

Risk Free Rate

We used a two-pronged approach for the valuation of NEOG, a Discounted Cash Flow
(DCF) Model and a Price-to-Earnings (P/E) Multiple. Given the importance of Neogens
future cash flows for acquisitions as well as its successful historical earnings, both valuation methods were equally weighted. In conclusion, the target price of NEOG is
$41.26.
Discounted Cash Flow Model
We used a Discounted Cash Flow Model: Free Cash Flow to the Firm forecasting 20
years of growth. This model makes the most sense in valuing NEOG because the company does not pay dividends to the investors but instead reinvests its cash to stimulate growth. Neogens growth will not taper quickly, so a forecasting horizon of 20
years is absolutely necessary to capture all of the future growth. When this model
was deployed, the intrinsic value of Neogen was calculated to be $38.10. The following factors significantly influence DCF Model. (See Appendix 5).
Sales Growth
When valuing NEOG, it is internally consistent to estimate only the companys organic
growth since forecasting acquisitions done above or below the fair market value
would impose serious problems. Therefore acquisitions would be done at the fair
market value and not generate returns in excess of the companies cost of capital. We
forecasted the first year growth to be 12% then utilized a linear smoothing algorithm
over a 20 year forecasting horizon to reach a perpetuity growth rate of 3% (See Figure
6).

2.71%

Beta

1.04

Market Risk Premium

3.45%

WACC

6.34%

Source: 20 year Treasury Bill, Yahoo Finance, Team

Estimates

WACC
Neogen has no debt in their capital structure therefore the Weighted Average Cost of
Capital (WACC) is equal to the equity cost of capital. The risk-free rate, 2.41%, was
determined from the current 20-year Treasury bill rate. The current Beta for NEOG is
1.04. The market risk premium was calculated to be 3.78%. Given these three variables, Neogens WACC is 6.34% (See Figure 7).
Acquisitions
Historically, Neogen has relied heavily on acquisitions to grow. The DCF model will
hold goodwill constant. This assumption eliminates any acquisitions that will be done
at a price different than the fair market value.
Price-to-Earnings (P/E) Multiple Valuation
The P/E Multiple Valuation considered the trailing twelve months of earnings per
share, $0.83, and the average P/E multiple, 53.53, for the last twelve
months. Through this method we determined an intrinsic value of $44.43. (See Appendix 6).
Risks of Valuation Methods
The DCF Model relies very heavily upon the terminal value. Neogens terminal
growth rate of 3% was chosen carefully, accounting for continued government regulations on food and animal safety worldwide. If the terminal value of 3% sales growth
were to alter at all, it would significantly affect the stock price. In addition to the terminal value being a large determinant in the stock price, the forecasted sales growth
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in the first year and forecasted margins are a strong factor in determining the price
(See Figure 8). The PE Multiple Valuation uses historical data and therefore not at risk
for differences between actual and forecasted future data.

FINANCIAL ANALYSIS
Figure 8: Sensitivity Analysis

Operating Margin

Sales Growth
10

11

12

13

14

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

38.10

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

Source: Team Estimates

Figure 9: Last 10 Acquisitions

Date

Company

10/1/14

BioLumix, Inc. 4.5M

1/2/14

Chem-Tech
Ltd.

17.2M

11/1/13

Prima Tech
Ltd.

12.9M

7/1/13

SyrVet, Inc.

11.5M

1/2/13

MetaMorphix, 3.4M
Inc.

10/2/12

Macleod Phar- 9.9M

maceuticals,
Inc.

5/1/12

Igenity

1/6/11

VeroMara Ltd. 1.0M

4/1/10

GeneSeek,
Inc.

21.0M

12/1/09

Gen-Probe,
Inc.

6.7M

Source: Factset

Price ($)

3.2M

Revenue growth
Figure 10: Revenue growth
Neogens revenue increased by
19.2% from FY13 to FY14, which out250%
performed the previous years
growth rate of 12.75% (see Figure
200%
10) The growth is largely attributed
to the recent acquisitions of Gene150%
Seek that added $23.7 million in revenue during the last year. In terms of 100%
segment margin growth animal safe2010 2011 2012 2013 2014 2015
ty has outperformed food safety.
Revenue
Operating Income
This was largely attributable to recent acquisitions in the animal safety
segment. We predicted the revenue growth to slowly decline over the next twenty
years before it reaches its terminal year. Neogens largest growth driver, acquisitions,
will not produce as much growth compared to previous years.
Increasing sales force and a new marketing department
Neogen has made changes to their workforce over the last couple of years, increasing
their sales revenue. One of the bigger operating additions is the increase of the sales
force that has undergone a 7.6% increase from FY13 to FY14. This is one of the reasons why Neogen experienced a high revenue increase and expansion of their products. In addition, Neogen has added a marketing department that will help drive revenuel
R&D driving future revenue
Research and development continues to be an important part of increasing revenue
for Neogen. Historically R&D accounts for 33% of Neogens growth and plays a huge
role in helping Neogen remain competitive and innovative in a market that is constantly demanding new products to solve new problems. We believe that R&D will
play a larger role within the Neogen over time as acquisitions become less frequent as
the company matures.
Acquisitions:
One of the main factors for Neogens growth over the years has been acquisitions.
Since 2000 Neogen has acquired 22 companies. Each of those acquisitions have been
done at or near the fair market value, and remarkably have been accretive within one
year, accounting for 23-29% of their total growth. We predict that Neogens acquisition rate will decline in the next twenty years. With 22 acquisitions since the year
2000 (See Figure 9), it is likely that there will be far fewer companies that are appropriate acquisition targets for Neogen going forward.
Ample cash and debt free balance sheet:
Neogen has a very strong balance sheet. Their cash balance has been trending upwards for many years and their balance sheet has never carried any long-term debt.
Management does not show any signs that they are planning to take on any longterm debt down the road . However, it was stated that if they needed debt in order
to take advantage of a growth opportunity, they would consider it. In addition, they
do have a line of credit for $12M, which has $0 drawn currently. So they are in a position to immediately take on debt if needed. Their strong balance sheet will be
7

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extremely beneficial to Neogen if they are planning to continue to expand through

acquisitions and potentially acquire larger companies in the Industry. It will also be
beneficial as they try to take market share in international markets.
Stock performance over time:
Neogen has been consistently outperforming its main competitor IDEXX Laboratories,
as well as NASDAQ Composite Index over the last 5 years. Figure 11 shows the stock
performance of Neogen compared to its largest competitor and the NASDAQ Composite and Healthcare. Despite Neogens historically stronger performance, recently,
the price has been reverting towards the mean stock performance. In addition, there
is a strong positive correlation between acquisitions closed by Neogen and the market
response. The market has not responded negatively to acquisitions.
Figure 11: Stock performance

Source: Factset

INVESTMENT RISKS
Market risk: Highly dependent on acquisitions
Neogen has been heavily reliant on acquisitions to expand its product lines and grow
the business. Over the years they have proven to be successful at seizing opportunities when they see them. Since acquisitions have been a crucial part of growth for the
company, failure to successfully identify and seize acquisition opportunities could adversely affect the financial and operational health of the company. In the future Neogen may not be able to find as many companies to acquire in order to continue the
expansion of its business.
Market risk: Extremely competitive environment
Neogens competes in a very saturated and competitive market. There are many well
established companies as well as the new entrants that come in the market and compete with Neogen. Neogens largest competitor, IDEXX is significantly larger in size
and therefore capable of allocating more resources to R&D. There could also be companies in the market that potentially have enough capital and resources to acquire
Neogen, especially as the P/E ratio begins to fall in the coming years.
Operational risk: Dependence on others
Neogen relies on third party suppliers to manufacture many of its products as well as
paying for licensing agreements for technology it uses. If the cost for inventory increases or licensing agreements become more expensive, the stock price may be adversely affected.

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Operational risk: R&D busts

Historically, NEOG has done a good job of meeting the market demand. For continued success they will need to make a habit of developing new products that meet the
market demand. It is hard to forecast exactly whether or not Neogen can succeed in
developing commercially practicable products which will meet the market demand at
the right moment. A miss by the R&D department could have very strong effects on
their bottom line.
Regulatory risk: Different standards globally
Neogens greatest opportunities lie outside of the United States. This poses a real
problem for Neogen because each country has different standards for there food.
Because of this, Neogen may have to develop new technology to meet those needs.
This will create an increase in expenses for Neogen going forward. If those expenses
are higher than expected then the stock price will be affected.
Political Risk: Regulations need to happen
As stated previously, Neogen will grow internationally. In order to do this, governments in emerging markets such as China, Brasil, and India need to follow through
with increasing food and animal safety regulations. If these regulations do not get
passed then there will be no need for Neogens products in those markets. A lack of
regulation would have a tremendous impact on Neogens future revenues.
Economic Risks: Greater exposure to currency risk
As Neogen becomes a more global company, their exposure to foreign currency will
increase. Neogen is growing quickly in countries such as Brasil, whom have extremely
volatile currencies. If a foreign currency rate were to move in a direction that does
not favor the United States dollar then Neogens value could be impacted by this.

$251,600

Total Assets

10

125,683
219,054

$251,600

Retained Earnings

Total Common Equity

Total Liabilities and Equity

93,371

Preferred Stock

Paid in Common Capital (Net)

32,546

Total Liabilities

9,974

Deferred Taxes

Minority Interest

2,593

Other Liabilities

19,979

Total Current Liabilities

0

8,410

Other Current Liabilities

Long-Term Debt

809

10,760

Income Taxes Payable

Accounts Payable

Current Debt
$0

8,578

Other Assets

Liabilities

69,148

Intangibles

143,941

Total Current Assets

Investments

4,652

Other Current Assets

29,933

34,992

Inventories

PP&E (Net)

35,652

$68,645

2012

Receivables

Operating Cash and Market. Sec.

Assets

Balance Sheet (in thousands)

$290,558

258,287

152,579

105,708

32,271

12,449

2,103

17,719

8,342

165

9,212

$0

$290,558

9,270

78,496

34,345

168,447

6,026

38,315

38,737

$85,369

2013

$345,301

306,300

182,353

123,947

39,001

12,155

1,879

24,967

11,571

13,396

$0

$345,301

11,504

103,102

41,949

188,746

9,171

51,178

51,901

$76,496

2014

$376,279

332,597

212,492

120,105

43,681

13,614

2,104

27,963

12,960

15,004

$0

$376,279

12,878

103,102

46,983

213,316

10,272

57,319

58,129

$87,596

2015E

$407,716

358,990

246,501

112,489

48,726

15,186

2,348

31,193

14,456

16,736

$0

$407,716

14,358

103,102

52,409

237,847

11,458

63,940

64,843

$97,606

2016E

$441,401

387,266

284,667

102,599

54,135

16,872

2,608

34,655

16,061

18,594

$0

$441,401

15,944

103,102

58,227

264,129

12,730

71,037

72,041

$108,321

2017E

$477,289

417,389

327,274

90,115

59,900

18,668

2,886

38,346

17,771

20,574

$0

$477,289

17,633

103,102

64,428

292,127

14,085

78,603

79,713

$119,726

2018E

$515,301

449,291

374,599

74,692

66,010

20,573

3,180

42,257

19,584

22,673

$0

$515,301

19,421

103,102

71,000

321,778

15,522

86,620

87,844

$131,793

2019E

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11/21/2014

Appendix 1: Balance Sheet

Income Statement (in thousands)

Sales (Net)
Cost of Goods Sold
Gross Profit
Gross Profit Margin
R&D Expense
SG&A Expense
EBITDA
EBITDA Margin
Depreciation & Amortization
EBIT
Interest Expense
Non-Operating Income (Loss)
EBT
Income Taxes
Actual Tax Rate
Net Income
Net Profit Margin
Earnings Per Share
2012
$184,046
(87975)
96071
52%
(6636)
(52050)
37385
20%
(3646)
33739
0
100
33839
(11450)
34%
$22,389
12%
$0.63

2013
$207,528
(93617)
113911
55%
(7781)
(61007)
45123
22%
(4417)
40706
0
435
41141
(14100)
34%
$27,041
13%
$0.76

2014
$247,405
(119424)
127981
52%
(8326)
(70881)
48774
20%
(5383)
43391
0
(360)
43031
(15000)
35%
$28,031
11%
$0.76

2015E
$277,094
(133755)
143339
52%
(11084)
(79387)
52868
19%
(6198)
46670
0
(403)
46267
(16128)
35%
$30,139
11%
$0.82

2016E
$309,098
(149204)
159894
52%
(12266)
(88556)
59073
19%
(6416)
52657
0
(450)
52207
(18199)
35%
$34,009
11%
$0.93

2017E
$343,408
(165765)
177643
52%
(13518)
(98386)
65739
19%
(6650)
59089
0
(500)
58589
(20423)
35%
$38,166
11%
$1.05

2018E
$379,981
(183419)
196562
52%
(14837)
(108864)
72860
19%
(6900)
65961
0
(553)
65408
(22800)
35%
$42,608
11%
$1.18

2019E
$418,739
(202128)
216611
52%
(16218)
(119968)
80425
19%
(7166)
73259
0
(609)
72650
(25325)
35%
$47,325
11%
$1.32

Eastern Michigan University Student Research

11/21/2014

Appendix 2: Income Statement

11

12

Net Change in Cash

+ Beginning Cash Balance
= Ending Cash Balance

+Increase in Debt
-Dividends Paid on Common
+/-Net Issuance of Common Stock
+/-Clean Surplus Plug
Cash From Financing

Financing:

Statement of Cash Flows (in thou-

-Capital Expenditures
-Increase in Investments
-Purchases of Intangibles
-Increase in Other Assets
Cash From Investing

Investing:

Net Income
+Depreciation & Amortization
+Increase in Deferred Taxes
+Increase in Other Liabilities
=Funds From Operations
-Increase in Receivables
-Increase in Inventory
-Increase in Other Current Assets
+Increase in Accounts Payable
+Increase in Taxes Payable
+Increase in Other Curr. Liabilities
Cash From Operations

Operating:

Statement of Cash Flows (in thou-

12562
56083
$68,645

0
0
8396
(709)
7687

2012

(11239)
0
(392)
(2514)
(14145)

$22,389
3646
1627
(1947)
25715
(7018)
(2998)
1139
2244
809
(871)
19020

2012

16724
68645
$85,369

0
0
12337
(145)
12192

2013

(8829)
0
(9348)
(692)
(18869)

$27,041
4417
2475
(490)
33443
(3085)
(3323)
(1374)
(1548)
(644)
(68)
23401

2013

(8873)
85369
$76,496

0
0
18239
1743
19982

2014

(12987)
0
(24606)
(2234)
(39827)

$28,031
5383
(294)
(224)
32896
(13164)
(12863)
(3145)
4184
(165)
3229
10972

2014

11100
76496
$87,596

0
0
(3842)
0
(3842)

2015E

(11232)
0
0
(1374)
(12606)

$30,139
6198
1459
225
38021
(6228)
(6141)
(1101)
1608
0
1389
27547

2015E

10010
87596
$97,606

0
0
(7616)
0
(7616)

2016E

(11842)
0
0
(1480)
(13322)

$34,009
6416
1572
243
42240
(6714)
(6620)
(1186)
1733
0
1497
30949

2016E

10715
97606
$108,321

0
0
(9890)
0
(9890)

2017E

(12467)
0
0
(1586)
(14053)

$38,166
6650
1686
261
46762
(7198)
(7097)
(1272)
1858
0
1605
34657

2017E

11405
108321
$119,726

0
0
(12485)
0
(12485)

2018E

(13101)
0
(0)
(1689)
(14790)

$42,608
6900
1797
278
51582
(7672)
(7565)
(1356)
1980
0
1710
38679

2018E

12067
119726
$131,793

0
0
(15423)
0
(15423)

2019E

(13737)
0
0
(1789)
(15526)

$47,325
7166
1904
294
56689
(8131)
(8017)
(1437)
2099
0
1813
43016

2019E

Eastern Michigan University Student Research

11/21/2014

Appendix 3: Statement of Cash Flows

13

0.52
0.20
0.18
0.12
0.12

Margin Analysis
Gross Margin
EBITDA Margin
EBIT Margin
Net Operating Margin (b4 non-rec.)
Net Operating Margin

Leverage Ratios
Current Ratio
Quick Ratio
7.20
5.22

0.90
1.61
63.75
138.96
38.67
7.04

0.12
0.78
1.15
0.11

Basic Dupont Model

Net Profit Margin
x Total Asset Turnover
x Total Leverage
= Return on Equity

Turnover Analysis
Net Operating Asset Turnover
Net Working Capital Turnover
Avge Days to Collect Receivables
Avge Inventory Holding Period
Avge Days to Pay Payables
PP&E Turnover

0.11
0.11
0.11

0.11
0.11
0.11

9.51
7.00

0.87
1.51
65.42
142.91
37.60
6.46

0.55
0.22
0.20
0.13
0.13

0.13
0.77
1.14
0.11

2013

2012

Key Ratios
Profitability Ratios
Return on Equity
Return on Equity (b4 non-recurring)
Return on Net Operating Assets

7.56
5.14

0.88
1.57
66.86
136.76
31.19
6.49

0.52
0.20
0.18
0.11
0.11

0.11
0.78
1.13
0.10

0.10
0.10
0.10

2014

7.63
5.21

0.87
1.59
72.47
148.04
37.05
6.23

0.52
0.19
0.17
0.11
0.11

0.11
0.77
1.13
0.09

0.09
0.10
0.09

2015E

7.63
5.21

0.89
1.58
72.61
148.32
37.17
6.22

0.52
0.19
0.17
0.11
0.11

0.11
0.79
1.13
0.10

0.10
0.10
0.10

2016E

7.62
5.20

0.92
1.57
72.75
148.60
37.30
6.21

0.52
0.19
0.17
0.11
0.11

0.11
0.81
1.14
0.10

0.10
0.10
0.10

2017E

7.62
5.20

0.94
1.57
72.89
148.89
37.43
6.20

0.52
0.19
0.17
0.11
0.11

0.11
0.83
1.14
0.11

0.11
0.11
0.11

2018E

7.61
5.20

0.97
1.57
73.03
149.18
37.56
6.18

0.52
0.19
0.17
0.11
0.11

0.11
0.84
1.15
0.11

0.11
0.11
0.11

2019E

Eastern Michigan University Student Research

11/21/2014

Appendix 4:Key Ratios

14

Assumptions
2015 Growth Rate
Terminal Growth Rate
WACC

Valuation to Common Equity (in thousands)

Net Income
Interest Expense
D&A
Change in NWC
CAPEX
Free Cash Flow to Common Equity
Present Value of FCF
Present Value Beyond 20 Years
Present Value of First 20 Years
Forecast Equity Value Before Time Adj.
Forecasted Value as of Valuation Date
Value Attributable to Common Equity
Common Shares Outstanding at BS Date
Equivalent Shares at Valuation Date
Forecast Price/Share

12.00%
3.00%
6.34%

2015E
2016E
2017E
2018E
2019E
Terminal Year
$30,139
$34,009
$38,166
$42,608
$47,325
135143
0
0
0
0
0
0
(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)
3,842
7,616
9,890
12,485
15,423
108,718
3,613
6,735
8,224
9,763
11,341
29,892
922,823
381,158
1,303,981
1,400,305
1,400,305
36,734
36,734
$38.12

Eastern Michigan University Student Research

11/21/2014

Appendix 5: DCF Analysis

Eastern Michigan University Student Research

11/21/2014

Appendix 6: P/E Multiple Valuation

P/E Multiple Valuation

Feb 14
May 14 Aug 14
Nov 14 Total EPS
$0.22
$0.23
$0.20
$0.18
$0.83
P/E Ratio
Price

15

53.53
$44.43

Eastern Michigan University Student Research

11/21/2014

Appendix 7: Meat Consumption

Source: "Meat Atlas 2014 -- Meat Consumption in industrialized countries" by Heinrich Boell Foundation

16

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or
publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject companys securities.
Disclaimer:
The Information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The Information is not
intended to be used as the basis of any investment decisions by any person or entity. This Information does not constitute investment advice, nor is it
an offer or a solicitation of an offer to buy or sell any security. This Report should not be considered to be a recommendation by any individual affiliated with CFA Society of Western Michigan, CFA Institute or the CFA Institute Research Challenge With regard to this companys stock.

17