Someone tell Alan Greenspan: The air is coming out of the bubble.
No, we're not talking about trivial home-price inflation. This is serious stuff -- brain food, a commodity that until recently was in short supply for makers of baby formula and, some would argue, for the management of Martek Biosciences
It's hard to imagine microscopic algae being worth more than $2 billion. But that was the market cap Martek hit less than two months ago, a mere 10 times the company's 2004 sales of $184 million. Then again, it's not every day that a product comes along to make human beings smarter -- at least, that's what the studies of the algae-derived fatty acids (DHA and ARA for short) Martek sells indicate. DHA and ARA help in developing the eyes and central nervous systems (including the brain) of newborns, and DHA helps promote adults' mental and cardiovascular health.
Martek's management deflated enthusiasm six weeks ago by announcing that its product was no longer scarce. In fact, it's been piling up in its customers' warehouses and on Martek's loading docks, causing a near-term reduction in orders. The surprise announcement sent the Columbia, Md.-based company's shares down an air whooshing 46% in one day to 52-week low of $32 a share.
Unfortunately, the release of second-quarter earnings and third- and fourth-quarter guidance Tuesday evening didn't provide reason for the stock to rebound just yet. It seems the fourth-quarter and full-year revenue will come in lower than the company projected six weeks ago.
Martek's problems are evident in its financial statements, with inventories climbing to $49.3 million from $11.9 million in the first quarter. Gross margins fell 5 percentage points to 38% in the quarter, compared to the first quarter. The company continues to bleed cash from its operations.
On its second-quarter conference call, company officials again reiterated that they have limited visibility into customer orders beyond the third quarter, a notion that frustrates investors who think the food industry supply chain isn't rocket science. Despite too much inventory, the company continues to air-freight product to foreign countries, an apparently expensive proposition, to meet customer orders.
Martek's management hinted at possible benefits from potential international product launches and the use of DHA and ARA in adult foods. It appears Kellogg Co.
Investors may want to exercise caution until the company changes its tune from "Oh Promise Me" and actually delivers reliable forecasts and earnings.
Fool contributor T.G. Wolf does not own shares of any companies listed in this article.
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