Why Shares of Omega Protein Skyrocketed


Source: Omega Protein

Omega Protein (NYSE: OME  ) , North America's biggest producer of Omega3 fish oil, fish meal, and specialty protein products, has significantly outperformed the benchmark index over the past year. While the S&P 500 increased by 16.4% during the past 52 weeks, Omega Protein's share price soared by 45.3% over the same period.

What's the magic behind Omega Protein's strong historical share price performance? Will Omega Protein continue this growth momentum going forward? It's also worth comparing Omega Protein with other companies that are leveraging the high-protein diet, such as Tyson Foods (NYSE: TSN  ) .

Excellent 2013 results
Omega Protein's share price surge over the past year has largely been a result of its excellent 2013 financial results. While its revenue increased by a mere 4% to $244 million, it more than doubled its gross profit and EBITDA to $83 million and $76 million, respectively.

Although Omega Protein's revenue from the animal nutrition segment came in essentially flat year on year, its human nutrition business saw revenue grow approximately 40% in 2013 to reach $31 million and accounted for 13% of its top line. This has given investors confidence that Omega Protein has positioned itself well to capitalize on the huge growth opportunities in this market.

The growth of the aging population and increasing health care costs have strongly increased interest in preventive health and nutritional products. Sales of supplements in the US have grown from $20 billion in 2003 to $32 billion in 2013, and estimates call for them to hit $36 billion by 2017.

Omega Protein has engaged in a series of acquisitions over the past few years to expand its presence in the human nutrition business. It acquired Wisconsin Specialty Protein and InCon Processing in 2013 and 2011, respectively. Wisconsin, a manufacturer of specialty whey protein products, has helped Omega Protein build a new business of supplying unique dairy-based nutritional ingredients; InCon, a specialty toll chemical processor, has enhanced Omega Protein's ability to engage in human grade Omega3 refining. 

As for Omega Protein's animal nutrition business, while volumes declined by 22% in 2013 as a result of a lower fish catch, a 30% increase in revenue per ton compensated for this. Omega Protein raised its selling prices for fish meal and fish oil by 19% and 15%, respectively, in 2013. This made the most significant contribution to Omega Protein's record gross margin and EBITDA margin of 34% and 31%, respectively.

While global fish meal and fish oil production growth has remained almost flat for the past decade, demand for seafood and pork has been growing at much faster rates. Global pork production has increased from 98.8 thousand metric tonnes in 2005 to 107.9 thousand metric tonnes in 2010; fish consumption has grown by 24% to 118 metric tonnes between 2000 and 2010. Omega Protein has benefited from favorable demand-supply dynamics, as animal feed producers use its fish meal products to add protein to their feed.

Looking ahead to 2014 and beyond
Omega Protein's financial performance in the first quarter of 2014 offers a peek into what investors can expect for the full year of 2014. It expanded its quarterly revenue and gross margin by 30% and 76 basis points, respectively; this was also the fourth quarter running in which Omega Protein has achieved a gross margin in excess of 30%.

For its animal nutrition business, Omega Protein continued to capitalize on favorable demand-supply conditions with price increases of 15% and 1% for its fish meal and fish oil, respectively, for the quarter. Based on its observations, Omega Protein highlighted that global supply has edged up slightly in 2014, but remained confident that pricing trends are likely to remain stable on the back of a growing global population and steady supply.

With respect to its human nutrition business, Omega Protein delivered a 25% year-on-year increase in segment revenue. More importantly, management commented that it has been 'encouraged by the number of different customers who purchased the product during the quarter.' This suggests that Omega Protein's human nutrition business is gaining traction as its customer base rapidly expands.

Source: Omega Protein

Back to basics
Putting numbers aside, it's worth asking what the investment merits of Omega Protein are. Do investors have other investment choices?

Another company that has outperformed the market over the past year is Tyson Foods, the largest poultry producer in the US. It has seen its share price grow by 43.3% over the last 52 weeks as it benefited from the growth of the high-protein diet. Based on its internal estimates, Tyson Foods expects the world's protein consumption to increase from approximately 50,000 million metric tonnes in the 1960's to breach the 300,000 million metric-ton mark by 2022.

On the other hand, supply hasn't been growing as much. With chicken and beef production remaining flat over the past 10 years, the composite average price of domestic meats has increased from $1.10 in 2002 to $1.80 in 2013. Over the past decade, Tyson Foods has expanded its top line and bottom line by compound annual growth rates, or CAGRs, of 3.4% and 8.7%, respectively.

However, Tyson Foods isn't the best proxy for the high-protein diet because it doesn't have fully vertically integrated operations. While it produces its breeder chickens and live broilers itself, it buys the livestock for its beef and pork businesses from other suppliers.

In contrast, Omega Protein is a fully vertically integrated producer of Omega3 fish oils and specialty protein products. Omega Protein owns the entire value chain for its animal nutrition business from fishing operations (which include vessels, spotter aircraft, etc) to production facilities armed with the technology for concentrating fish oils. On the other hand, it owns a manufacturing facility for concentrating organic cow and goat proteins via its newly acquired Wisconsin Specialty Protein.

There are two benefits associated with Omega Protein's vertical integration strategy. Firstly, Omega Protein's 'Made in America' claim, by virtue of its complete value chain, gives its customers confidence in the quality and safety of its products. Secondly, Omega Protein enjoys greater control over its input costs since it owns its fishing operations.

Foolish final thoughts
While there are other protein and food companies listed out there, Omega Protein stands out with its vertically integrated operations. In addition, its future growth prospects look promising because it benefits from supply demand imbalances in the fish meal market and capitalizes on the huge growth potential of the human nutrition business. 

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