Maybe Still a Misfit? Neogen Corporation (NEOG)

Neogen's deal to acquire 3Ms food safety unit sure was transformative, but not in the way management hoped.

Sorry for the late publication this week. On a semi-related topic. I’ll be at the Markel Annual Meeting this week. If you plan to attend, email me at misfitalphablog@gmail.com and we can schedule a meetup.

St. Roch Blessing the Animals, Tintoretto, 1567, oil on canvas

I will go to my grave saying that investors should be dubious of mergers & acquisitions. Only a select few businesses have done M&A well, and most of the successful ones have stuck to a gameplan of acquiring much smaller fish. When a company tries to swallow an elephant, culture and financial challenges aren’t far behind.

Neogen Corporation (NASDAQ: NEOG) appears to be another company that will destroy a lot of shareholder value from M&A. The food safety and animal welfare business had been a poster child of consistency and market-beating returns. At its peak, the company’s returns over the prior 30 years had 12x’d the market.

All of that success started going sideways a few years ago after, you guessed it, a
transformative” M&A deal. A deal that has already wiped out a decade of returns

This collapse poses a unique question. Neogen was once an absurdly valued company. At one point, it traded for 75 times earnings and 11 times tangible book value. Today, it's trading for less than book value, and forward earnings expectations are at a more reasonable 26 times.

I can see the wheels turning in your head because I was thinking the same thing. Is this a quality business in the midst of a turnaround?

Let’s dig in.

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