What could explain a company reporting a 78% increase in quarterly revenues, yet also being the biggest percentage loser of the day on the Nasdaq? Answer: Guidance for the fourth quarter that is well below what analysts were expecting.
After the market closed yesterday, nutritional supplement maker Martek Biosciences
First, the good: Based on strong demand for Martek's supplements in infant formula, revenues increased 78% to $70 million in the third quarter, versus the $40 million the company earned last year. Gross margins increased 3% to 38% and net income grew to $5.3 million, representing $0.16 a share in earnings.
Now, the bad: Martek stated that because of consumer buying patterns, the fourth quarter would produce revenues in the range of $63 million to $66 million. This is obviously lower than what the company earned in the most recent quarter, but still represents about a 15% increase from the fourth quarter of 2005. Analysts were expecting revenues to increase to $75 million for the upcoming fourth quarter. Even with the reduced revenue predictions, Martek will still grow earnings to $0.62-$0.65 per share for 2006, compared to the $0.48 earned in 2005.
The other contributor to Martek's decline was its estimate that gross margins would be down 4%-5% for the next four quarters, thanks to increased costs from its suppliers. It's tough to fault Martek for this miss, though.
What I like about Martek is that the company is not resting on its laurels. It continues to invest in its future via more research and development spending -- it's up 17% compared to last year -- and by rapidly signing licensees and new supply agreements for its products. In the past couple of months, big companies like General Mills, Roche, and Hain Celestial Group all have signed up to use Martek's supplements in their products. Without giving any specifics, Martek reported that more companies would sign up to use its supplements in 2007, which would lead to further sales growth next year.
If the predicted decline in Martek's fourth-quarter revenues is really just an aberration -- and with consumers throughout the world becoming more health-conscious -- there will be lots of future demand for Martek's products. Now could be a great time for investors to buy into this rapidly growing supplement company trading at roughly 34 times 2006 earnings.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. He welcomes your feedback. The Motley Fool has a disclosure policy .
