NEOG: Rising Profit Margins And New Partnerships Will Drive Future Expansion

Key Takeaways

• Regulatory changes and rising food safety concerns are fueling increased adoption of Neogen's core diagnostic technologies, expanding its market and driving durable revenue growth.
  
• Portfolio streamlining and operational improvements position Neogen for higher-margin, higher-quality earnings and sustainable competitive gains through innovation and international expansion.
  
• Prolonged integration challenges, macroeconomic headwinds, declining animal safety revenues, trade-related margin pressures, and recent divestitures are constraining profitability, top-line growth, and financial visibility.

Catalysts

Develops, manufactures, and markets various products and services for food and animal safety in the United States and internationally.

• Intensifying regulatory focus on microbiological testing-evidenced by the USDA's prioritized policy plans and a 200%+ increase in Listeria sample testing with Neogen's Molecular Detection System-signals rising, durable demand for Neogen's advanced diagnostic platforms, supporting higher future revenue growth as food safety testing volumes increase.
  
• Ongoing global complexity and risks within the food supply chain, alongside heightened consumer expectations for food safety and transparency, will drive further adoption of Neogen's innovative pathogen detection and digital solutions by food producers and regulators, expanding the company's addressable market and underpinning sustainable long-term revenue expansion.
  
• Operational improvements and automation at the new Petrifilm production facility, alongside targeted actions to reduce inefficiencies in sample collection and inventory management, are expected to drive gross margin and EBITDA margin improvements over the coming quarters as execution stabilizes and overhead absorption rates improve.
  
• The company's portfolio simplification-divesting lower-margin and non-core businesses (cleaners and disinfectants, genomics) and focusing on core food safety and animal health verticals-sets the stage for improved net margins and more resilient, higher-quality earnings, supported by ongoing deleveraging and reduced operational complexity.
  
• Continued investments in R&D and new rapid-testing assays (such as the recent launches on the MDS platform), combined with expansion in Europe and other international markets, will allow Neogen to capture share from competitors and participate in the secular growth of high-throughput, automated diagnostic solutions, thus boosting both revenue and future earnings potential.

Neogen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Neogen's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts are not forecasting that Neogen will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Neogen's profit margin will increase from -122.1% to the average US Medical Equipment industry of 12.5% in 3 years.
• If Neogen's profit margin were to converge on the industry average, you could expect earnings to reach $107.3 million (and earnings per share of $0.49) by about September 2028, up from $-1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from -1.1x today. This future PE is lower than the current PE for the US Medical Equipment industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Neogen Future Earnings Per Share Growth

Risks

• Ongoing inefficiencies and execution shortfalls in integrating the 3M Food Safety business (notably with Petrifilm and sample collection) are resulting in significant manual labor, excess scrap, and elevated costs, which are compressing gross margins and reducing EBITDA, with management indicating that consistent operational improvement will be gradual and extend over multiple quarters.
  
• The persistent macroeconomic softness, driven by cumulative inflationary pressures on consumers and muted food production volumes, is expected to continue at least through fiscal 2026, limiting organic revenue growth within both Food Safety and Animal Safety segments and lowering the company's growth rates versus historical levels.
  
• Animal Safety remains significantly affected by a multi-year decline in cattle herd size (at a 70-year low), cautious purchasing by ag retailers and vet distributors, and ongoing end-market cyclicality, all of which have resulted in sustained revenue contraction in that segment, impacting consolidated top-line growth.
  
• The company is exposed to increased global trade uncertainty and tariffs (now a $10 million annualized headwind), with management noting these impacts are not fully mitigated, creating margin pressure and further unpredictability around earnings and forward guidance.
  
• Recent and ongoing portfolio divestitures (cleaners/disinfectants and genomics businesses), while aimed at strategic focus and deleveraging, raise risks of stranded costs, loss of revenue diversification, and a reduction in earnings, especially as some associated costs will linger under transition agreements for up to a year, potentially weighing on net margins and near-term free cash flow.

Valuation

• The analysts have a consensus price target of $6.5 for Neogen based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $859.1 million, earnings will come to $107.3 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 9.1%.
• Given the current share price of $5.72, the analyst price target of $6.5 is 12.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.