Summary: Omega Protein (OME) is a $450 mil. market cap fishing concern that is dependent on the commodity fishmeal and fish oil businesses. The stock price has risen over the past year despite recent declines in industry prices. Some analysts believe that prices may continue to fall. Omega faces a long list of other issues including restrictions on its harvests and violations of labor and environmental laws. Meanwhile, Omega’s efforts to diversify into human nutrition have likely destroyed shareholder value. I believe that OME is a short and that there could be 35% downside to the stock price.

Introduction: Omega Protein (OME) harvests menhaden fish in the Gulf of Mexico and Chesapeake Bay. These fish are “reduced” into fishmeal and fish oil products that are used in aquaculture, feed for livestock, pet food, and human supplements. Omega has acquired four human nutrition companies in an effort to reduce its dependence on the cyclical fishing business. Omega’s stock price recently broke $25 for the first time due to record profits and favorable fishmeal and fish oil market conditions.

Note: I held off on finishing this report until Q4 was announced. The good news is that the Q4 release exposed some of the reasons why I like this stock as a short. The bad news is that the stock price dropped more than 20%. Investors reacted to weakness in industry trends and disclosure of a new SEC investigation (discussed later). It may be worthwhile to wait for a rally to short OME. The stock can be volatile. The price also tanked in March, 2016, but recovered by mid-summer.

Earlier Reports

Reports on Omega have been posted on VIC three times: in 2001 (long), 2007 (long), and 2011 (short). All three of these recommendations worked out pretty well. Par03’s timely 2011 short report called Omega “a fundamentally weak business”. It still is. Par03’s report focused on the $44.9 mil. in compensation that Omega (perhaps undeservedly) received from the 2010 BP oil spill. This lucky break and industry factors pushed OME from $4 in mid-2010 to nearly $15 in early-2011. The good times did not last, however, as OME was back in the single digits by late-2011. Over the past four years, though, OME has recovered. The stock price hit its all-time high in February, but traded down after Q4 2016 was reported.

Background

Omega Protein’s main business has always been the harvesting and processing of a small fish called menhaden (also known as pogy, bunker, and other names). Omega, based in Houston, does most of its fishing in the Gulf of Mexico. It operates fish processing plants in Moss Point, MS, and Abbeville, LA. The company also operates a fishing fleet and processing facility in the Chesapeake Bay town of Reedville, VA. The predecessor company to Omega was founded in Reedville in 1913. There were approximately twenty fish reduction plants in Virginia at the time. Today, Omega’s facility in Reedville is the only operating menhaden processing plant on the entire East Coast. In 2010, Omega embarked on an acquisition spree to diversify its business away from fishing. It acquired Cyvex Nutrition (2010), InCon Processing (2011), Wisconsin Specialty Protein (2013), and Bioriginal Food & Science (2014). Omega completed its IPO at $16 in 1998. The stock has traded below its IPO price for most of its history as a public company. The current CEO, Bret Scholtes, has worked at Omega since 2010 and became CEO in 2012.

Menhaden Fishing

Image: Chesapeake Bay Foundation

            Omega’s primary business is menhaden fishing and processing in the Gulf of Mexico and Chesapeake Bay. Menhaden are small, bony, and oily fish that swim in tightly-packed schools. Industrial-scale menhaden fishing dates to the 1800s and the use of menhaden as fertilizer goes back long before that. Omega owns a fleet of 38 fishing vessels and 27 small planes. The pilots of the planes act as a spotters and direct the fishing boats to the fish. The fish are scooped up by the tens of thousands by small crews of fishermen with 1,500 foot nets. This is called purse seine fishing. Then, the fish are stored in larger boats and taken to Omega’s facilities where they are “reduced” to chemicals used for fishmeal, fish oil and solubles. Nearly all (94% in 2016) of Omega’s fish oil is used in aquaculture. Aquaculture is the process of raising fish for food. Fish production from aquaculture has grown steadily over the past 25 years as fish production from the wild has been flat. Fishmeal is a protein supplement that is often used in livestock feed, pet food, and aquaculture.

            Omega’s fish catch, yield, and production numbers have trended down over the past couple of decades. Omega’s production is the amount of fishmeal, fish oil, and solubles that are produced from the fish. The yield is the production divided by the fish catch. Omega caught over 500K tons of fish and produced over 200K tons in every year from 1999-2007. In the past nine years, however, Omega has caught more than 500K tons fish just three times and produced over 200K tons only once. These numbers suggest that it is becoming increasingly difficult for Omega to find fish. Also, the size and quality of the fish may be declining. Omega’s yield used to be around 40%, but it has averaged 35.6% since 2011. The yield is based on environmental factors (weather, water temperature, age of fish, etc.) that Omega cannot control.

Product Pricing

            Omega’s fishmeal and fish oil businesses are commodities. The long-term trend in prices for both products has been upwards as demand has increased while supply has decreased. Worldwide fishmeal production has declined by approximately two million tonnes (2,000 kg) over the past twenty years. Peru and Chile are the largest exporters of fishmeal and fish oil and represent more than 50% of the world supply of both. These two nations harvest anchovies and sardines. Per the USDA, Peru produced 750,000 tonnes and Chile produced 430,000 tonnes of fishmeal in 2016. These were very poor numbers. Supply from both nations has fallen off greatly in the past few years due to El Niño weather patterns, global warming, and chronic overfishing. Peru’s average fishmeal production in last four years was one-half the average of the previous ten. Also, production facilities in Chile were damaged in the February, 2010, earthquake and tsunami disaster. Supply disruptions have caused large price spikes that have benefitted Omega and other producers. Over the past couple of years, however, prices have trended downwards as worldwide supply has stabilized. The Peru fishmeal price has dropped more than 20% in just the last six months and has now reached its lowest level since 2009.

http://www.indexmundi.com/commodities/?commodity=fish-meal

            Industry trends have been unusually favorable for Omega. As with many commodities, fishmeal and fish oil prices are difficult to predict and can be very volatile. Soybean meal and soybean oil are often seen as replacements for fishmeal and fish oil. In the past, prices of these commodities tended to track each other. In the last few years, however, fishmeal prices have been stronger than soybean meal prices and fish oil prices have been significantly stronger than soybean oil prices. It appears that fish oil has become less of a commodity than it used to be due to the growth of aquaculture. One result of these trends is that fishmeal and fish oil are much less common in pet food and livestock feed than they used to be. Fishmeal, in other words, is becoming too expensive to feed to pigs.

            The price increases in fish oil and fishmeal are truly remarkable. I made some estimates from pricing information in Omega’s 10-Ks. I estimate that the realized prices from fishmeal sales have increased about 350% over the past 15 years (8.7% CAGR). Further, I estimate that the realized prices from fish oil sales have increased about 820% over the past 15 years (15.1% CAGR). Moreover, Omega’s revenue per ton sold (combined fishmeal and fish oil) increased from $845 in 2009 to $1,455 in 2016 (8.1% CAGR).  

The favorable prices of fishmeal and fish oil may not be sustainable. Gorjan Nikolik of Rabobank forecasts that, “We expect a softening of prices next year (2017) compared to 2016” for fishmeal. He expects a range of $1,200 - $1,600 / tonne. His outlook is partly based on increased anchovy fishing in Peru and soft demand due to outbreaks of illness at fish farms. Nikolik has been bullish on fishmeal and fish oil for years but believes that the long-term trend in higher prices is pushing buyers to find alternatives. The United Nations also forecasts that the high prices may not last. In a 2016 publication entitled, “The State of World Fisheries and Aquaculture”, it forecasts that, “By 2025, the average fishmeal price is expected to be 14% lower in nominal terms and 30% lower in real terms compared with the base period (2013-15).” It also forecasts that, “The average fish-oil price is projected to decline by 3% in nominal terms, and 21% in real terms, between the base period (2013-15) and 2025.” Omega is partially dependent on high prices for its products.

http://www.feednavigator.com/Markets/Fishmeal-prices-predicted-to-soften-in-2017-compared-to-2016

http://www.fao.org/3/a-i5555e.pdf

http://www.indexmundi.com/commodities/?commodity=fish-meal

2017 Fishmeal Production May Double

            An industry analyst recently forecast very high worldwide fishmeal production for 2017. The Marine Ingredients Organisation (IFFO) is a London-based trade group that promotes fishmeal and fish oil. IFFO chief analyst Enrico Bachis appeared at the North Atlantic Seafood Forum in Bergen, Norway in March, 2017. In a presentation, he forecasted that worldwide fishmeal production would increase from 2.7 mil. tonnes in 2016 to 5.3 mil. tonnes in 2017 (a 96.3% increase). He said that 2016 production was very low due to El Niño and reduced quotas in Chile, Peru, and Europe. He also said that fish oil yields in 2016 were unusually poor in many regions. He expects big increases in both fishmeal and fish oil output in 2017. He estimated that, “Over 5 mil. tonnes of fishmeal output and 900,000 tonnes of fish oil production appear as a real possibility.” It is very likely that prices will fall further If Bachis’ forecast if correct.

https://www.undercurrentnews.com/2017/03/15/iffo-global-fishmeal-output-to-surpass-5m-metric-tons-in-2017/

Fishing Gross Margins

            Omega’s gross margins are very difficult to forecast. While the fish are obviously free, there is considerable expense in hauling them out of the ocean. The cost per ton is based on the variable plus fixed costs to operate a fleet for the season dividend by tons of production. Omega can forecast its fleet costs but cannot know its production at the beginning of the fishing season. So, it makes estimates that are “trued up” at the end of the season. These estimates can be too high or too low. Complicating matters further, sales in Q1 and Q2 are based on the previous fishing season but sales in Q3 and Q4 are based on the current season. Gross margin can, therefore, change significantly from Q2 to Q3. Omega’s gross margin on “animal nutrition” (its fishing segment) was 37.3% in 2016. This was an extremely high number and will be difficult to duplicate. Omega’s animal nutrition gross margins were typically around 20-25% until the recent price spikes. Omega’s animal nutrition gross margins were 20.9% in 2011 and 17.3% in 2012.

            Omega uses derivatives to lock in prices. In 2015, Omega sold forward 72K tons of fishmeal and 10K tonnes of fish oil for sale in 2016. These forwards helped Omega to report strong gross margins in 2016 as prices were very high in 2015. Omega reduced its forward sales in 2016. It sold forward 52K tons of fishmeal and 7K tonnes of fish oil for sale in 2017. It is likely that these forward sales were completed at much lower prices than the previous year. Omega ended 2016 with $8.1 mil. lower animal nutrition inventory than the previous year, implying that Omega has less inventory to sell in 1H 2017. Omega’s hedging means that declining prices do not immediately reduce its gross profits. There is a significant lag. It appears highly unlikely that Omega can match its 2016 gross margin in 2017.  

Menhaden: Omega’s Wasting Asset

“A growing number of observed sightings of very large menhaden schools have validated the strong findings of the ASMFC’s most recent assessment. This illustrates to us that there should be no doubt that the stock is robust and healthy enough for increased harvest.” – OME CEO Bret Scholtes, press release (10/26/16)

http://ir.omegaprotein.com/releasedetail.cfm?ReleaseID=995760

“At every moment in its long history, the reduction industry has denied, counterintuitively, that fishing has any impact on the number of menhaden in the Atlantic.” – Alison Fairbrother, “A Fish Story”, Washington Monthly (May / Jun 2012)

http://washingtonmonthly.com/magazine/mayjune-2012/a-fish-story/

“The real question is, where does a fish like a menhaden have its value? As fish meal and oil or in a matrix of the food web?” – Paul Greenberg, author of Four Fish and other works (2015)

http://www.pewtrusts.org/en/research-and-analysis/analysis/2015/04/28/tracking-fish-oil-supplements-to-the-source

Omega’s menhaden fishing activities are controversial and face numerous threats. Omega’s fish catch, as previously discussed, has trended downwards over the last twenty years. The industry has, in fact, been declining for more than a century. In 1876, there were 99 menhaden reduction plants on the Atlantic Coast. In 1956, there were twenty. Today, Omega’s plant in Virginia is the only one left. The total menhaden catch on the East Coast has declined about 70% since the 1950s. In the Gulf of Mexico, large-scale menhaden fishing did not develop until the post-World War II period. The number of Gulf Coast menhaden reduction plants peaked at fourteen in the 1980s, but there are now only three. The total menhaden catch in the Gulf has declined about 50% since the mid-1980s. Statistical and observational evidence has convinced many individuals and groups that the menhaden fishery is in trouble. Omega, though, is not one of them. The company often claims in press releases, public statements, research, and other media that menhaden is not overfished and that overfishing is not occurring. Omega wants the public and investors to believe that the matter is resolved. It isn’t.

 Menhaden fishing is controlled by state laws and a federal commission. Purse seine fishing is a very effective way to catch huge numbers of menhaden. It is so effective, in fact, that many states have banned or severely restricted the practice in their waters. Omega operates in three of the few states (VA, LA, and MS) where the practice is still allowed. Fishing on the Atlantic Coast is managed by a federal agency called the Atlantic States Marine Fisheries Commission (ASMFC). All fifteen states on the Atlantic Coast have representation on the commission. It is known to be generally friendly to commercial fishing and state political interests. The ASMFC has the authority to place quotas on individual species fishing on the Atlantic Coast. For years, Omega and its political allies in Virginia have fought all attempts to place quotas on menhaden. Omega invariably claims that menhaden have not been overfished and that no quotas are necessary. Supporters of quotas include local and national environmental groups, biologists, oceanographers, tourist businesses, sport fishermen, and other commercial fishing interests. The battle over menhaden is pretty much a battle of Omega Protein vs. Everybody Else.

The ASMFC has recently adjusted quotas on menhaden. There was no limit on menhaden fishing at all until a weak quota was implemented in 2005. This quota had little effect on Omega’s fishing. In subsequent years, though, new data and pressure from many groups convinced the ASMFC that it needed to protect menhaden. Omega lobbied hard against stronger quotas and enlisted political allies in Virginia to fight on its behalf. Virginia, at one point, even threatened to pull out of the commission. In 2012, though, the ASMFC approved a 20% cut in the menhaden quota to 170,800K tonnes for the 2013 and 2014 fishing seasons. This quota reduced Omega’s fish catch (and stock price). The new quota was favorable to Omega in one way, though, in that 85% of the quota was granted to Virginia. The ASMFC, in other words, limited the menhaden catch but also allowed Omega to take almost all of it. The firm, which called the quota “wholly unnecessary”, continued to lobby against it. It caught a break in early-2015 when new data indicated that the menhaden population was in better shape than previously believed. The ASMFC increased the quota by 10% for the 2015 and 2016 fishing seasons. In late-2016, the ASMFC increased the quota for the 2017 fishing season by another 6.45%. These recent quota increases have helped Omega, but they may not last.

Menhaden are an important part of the marine ecosystem. Forage fish like menhaden occupy the lower part of the ocean food web and are a major part of the diet for many carnivorous fish, mammals, and birds. Menhaden also clean the water by feeding on algae and plankton. There is great concern that Omega is taking too many fish out of the ocean and hurting water quality and populations of other fish. Striped sea bass, for example, eat menhaden. In a 2011 Baltimore Sun article, a biologist with the Chesapeake Bay Foundation explained that the declining menhaden population adversely affects the size, health, and numbers of sea bass. Moreover, the lack of menhaden forces the sea bass to eat more crabs which, obviously, adversely affects the population of crabs. Research by the Pew Charitable Trusts and others suggests that forage fish are a critical species for both the health of the ocean and the economy. Menhaden is, by itself, tiny part of the seafood business. The fish that eat menhaden, though, are a significant part of the multibillion dollar U.S. seafood industry. Pew determined that the large-scale harvesting of menhaden and similar fish creates sizable net economic losses as it reduces the size of other commercial fisheries.

The health of the menhaden fishery is widely debated. The science of the menhaden debate is too long and complicated to explain here. An excellent article (linked below) on the issue appears in the May / June 2012 issue of Washington Monthly magazine. The basic issue is this: Omega cares about the sustainability of its business while other groups care about the health of the ecosystem in which menhaden live. When Omega states that menhaden is “not overfished”, it is not arguing that there are as many menhaden as there were 50 or 25 years ago. It is, instead, arguing that the menhaden are laying enough eggs that the population size in the next few years should be about the same as the last few years. Omega is concerned about its annual fish catch, not the fact that the menhaden population is a fraction of what it once was. It is also not concerned about the health of the many species that feast on menhaden. Some people have noticed that Omega is more than a little biased. At a 2016 ASMFC meeting, a skeptical representative from New Jersey asked an Omega-friendly scientist, “Can you let us know when the last time every run you did for a species generated a zero percent chance of overfishing…?”

There are lots of critics of Omega’s fishing business. One of these is a fisherman and author named Paul Greenberg. He has called for a ban on large-scale menhaden fishing. He is currently writing a book entitled The Omega Principle: A Journey to the Bottom of the Marine Food Web. Greenberg recently tweeted a pic of himself on a jet ski near one of Omega’s boats in Chesapeake Bay. An upcoming episode of PBS’ Frontline will feature his work and discuss the menhaden controversy. The loudest critic of Omega has been a Rutgers professor named H. Bruce Franklin. In 2007, Franklin published a book called The Most Important Fish in the Sea. The book discusses the history of menhaden fishing and the importance of the fish in the Atlantic ecosystem. It greatly increased interest in menhaden among the public and media and continues to be cited in many articles. In a 2011 op-ed, Omega’s lawyers dismissed Franklin as a “science fiction expert” (he has written books on it) who turned menhaden into a “cause célèbre”.

The fight over menhaden quotas is far from over. Many conservation groups vehemently disagree with the ASMFC’s recent actions. They want the ASMFC to consider the importance of menhaden in the food web. They appear to be having some success. Per a recent statement, the ASMFC is, “…developing ecosystem-based reference points for menhaden that account for predation to provide guidance to managers on how much menhaden biomass is required to meet the needs of their primary predators.” This is, obviously, bad news for Omega. It does not want ecosystem-based management at all. It uses the same “the science is incomplete” argument used by deniers of climate change. In one of its publications, for example, Omega claims, “The scientific models and data required to implement such a strategy (ecosystem-based management) don’t yet exist in a form that can confidently be put to use…”  There are also commercial fishing interests that dislike Omega’s control over the menhaden harvest. Two examples: Lobstermen in Maine complain that they cannot get enough menhaden for lobster traps and sport fishermen on Long Island Sound complain that there are not enough menhaden for larger fish to eat. In one publication, Omega makes the dubious claim that, “There is no evidence that any predator species has declined as a result of menhaden fisheries.”

            The future of industrial-scale fishing is uncertain. Menhaden fishing has been declining for decades. While Omega claims that menhaden are not overfished, its own results suggest otherwise. On the Q4 2016 earnings call, Omega revealed that, “…our Atlantic season ended on December 16, after catching 96% of our Atlantic quota.” The fishing season usually ends at the beginning of November. Omega extended its 2016 fishing season by several weeks but still could not catch its quota. Omega catches millions upon millions of menhaden every year. The ASMFC quotas will not matter very much if there are not enough fish to catch.

http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2013/09/25/forage-fish-faq

http://washingtonmonthly.com/magazine/mayjune-2012/a-fish-story/

http://omegaprotein.com/omega-protein-announces-atlantic-states-marine-fisheries-commission-votes-to-increase-menhaden-harvest-quota/

 http://www.asmfc.org/fisheries-science/stock-assessments

https://www.nytimes.com/2016/10/26/opinion/not-just-another-stinky-fish.html?_r=0

http://www.baltimoresun.com/features/green/bs-gr-menhaden-20111030-story.html

http://wvtf.org/post/menhaden-fishing-limits-are-swimming-controversy#stream/0

The Unhealthy Human Nutrition Business

“Increased sales of nutritional products for direct human consumption is a key component of Omega Protein’s business strategy to diversify our business model and increase growth, while decreasing our exposure to commodity based earnings volatility.” – OME CEO Bret Scholtes, press release (9/8/14)

“In the 23 years of managing our small cap value fund, Wynnefied Capital Management, LLC and its affiliates have never observed a more glaring case of “Diworsification” than the risky and unsuccessful effort of Omega Protein Corporation to enter the human nutrition field.” – Wynnefield Capital 13-D (8/1/15)

The BP oil spill presented a rare opportunity for Omega Protein. In 2010-11, Omega received nearly $45 mil. in business disruption payments from the Gulf Coast Claims Facility. It is not clear that the company deserved them. Omega had, after all, announced in a press release that, “The oil spill has not had a material adverse effect on the volume of the Company’s fish catch…” Indeed, Omega’s 2010 fish catch turned out to be better than normal. The company, though, claimed damages and received one of the largest BP payments. Omega’s management decided to use the windfall to diversify into the nutritional supplements business. This business has some relationship to Omega’s main business as Omega-3 fish oil has become an important supplement for human nutrition. It is part of the reason why fish oil prices have been strong in recent years. Omega made four acquisitions in the supplements area from 2010-14. In filings, it reports its supplements business as “human nutrition”. Human nutrition represented 32.8% of Omega’s 2016 revenues.

Omega diversified into food and nutritional supplements. In December, 2010, Omega acquired Cyvex Nutrition. Cyvex is a supplier of dietary supplements, including Omega-3. In 2011, Omega bought another company in the Omega-3 business when it bought InCon Processing. InCon uses molecular distillation to concentrate Omega-3 and other compounds. In 2013, Omega acquired Wisconsin Specialty Protein (WSP). WSP has no relation to fish oil as it produces whey protein (dairy) ingredients. The Cyvex, InCon, and WSP deals were all rather small. After the deals, Omega reported $31 mil. in 2013 human nutrition revenues. In 2014, Omega made its largest acquisition by far when it bought Bioriginal of Saskatoon, Saskatchewan. Bioriginal supplies specialty oils and fatty acids to the food and nutraceutical industries. Its products include plant (e.g., coconut, cocoa) and fish products that are not generally associated with the Canadian Prairies. Omega paid $70.5 mil. for Bioriginal, mostly in cash and assumed debt. Its management also received some restricted stock and (wholly undeserved) earn-out payments. Bioriginal reported $98 mil. in revenues in its fiscal 2014, so Omega paid approximately 0.7x sales for the business. In total, Omega spent approximately $150 mil. on the four deals.

Omega’s human nutrition strategy appears to be failing. Human nutrition was supposed to be the growth driver. Instead, revenues from human nutrition fell from $139.2 mil. in 2015 to $128.2 mil. in 2016. The profitability picture has been even worse. Omega often claimed that the human nutrition deals would be accretive to earnings, but the human nutrition segment has reported increasing operating losses: -$11.1 mil. in 2014, -$12.0 mil. in 2015, and -$15.8 mil. in 2016. Omega recorded goodwill impairments in each of these years. Results at the three smaller businesses have been so poor that it wrote off all the goodwill associated with Cyvex, InCon, and WSP. In Q4 2016, Omega recorded a small goodwill impairment for Bioriginal. In the 10-K, it disclosed that, “The revised assumptions as compared to the annual assessment included (i) lower sales volumes for certain products, primarily due to slower than anticipated growth in customer demand and (ii) reduced pricing and margins for certain products due to changing market conditions.” It is entirely possible that Omega will report further goodwill write-offs as it still carries $26.3 mil. in goodwill and $17.5 mil. in other intangibles on its balance sheet.

Omega has been unable to accurately forecast demand for its human nutrition products. One of the reasons that the company entered human nutrition was to reduce its exposure to fishmeal and fish oil pricing. Now, though, it is exposed to pricing for other commodities. It is also exposed to various retail markets. Omega has lost some customers to private label competitors. Bioriginal has struggled with customer losses and low pricing for coconut oil. It does not appear to have any growth. WSP has posted poor results due to weak dairy prices. Omega had clearly not anticipated this downturn as it spent more than $20 mil. to expand WSP’s production capacity just three years ago. Omega also expanded production at its InCon plant in 2014. Pricing for concentrated oil has been so poor that Omega gave up and decided to close the business last year. This was quite a reversal as Omega had previously called InCon’s expansion a “tremendous success”. Omega paid approximately $9.3 mil. for InCon in 2011 and spent several million dollars more on the expansion. Omega sold InCon to POS Bio-Sciences in late-2016 for a whopping $500,000.

Omega may exit the human nutrition business entirely. The industry is changing as nutritional supplements are becoming less specialized and more mass market. Omega lacks the scale of some competitors. In early-2017, the company announced a strategic review of the human nutrition business (discussed more later). This review could result in an unceremonious exit from the segment. Omega’s net book value for the human nutrition segment is approximately $125 mil. ($75 mil. for Bioriginal and $50 mil. for dairy / WSP). This value includes working capital (inventory) and intangibles of $30+ million. Last year, Tim Ramey at Pivotal Research suggested that the human nutrition business could be worth $100 mil. (approximately $4.50 / share). It is not clear to me, however, that anybody would pay approximately 1.0x tangible BV for the business. Omega did not even pay that much when the businesses were acquired and results have been consistently poor. It is possible that Omega will shutter some of the weak product lines and try to develop products with more potential.

http://www.cbsnews.com/news/how-fate-and-45m-from-bp-gave-one-fish-oil-producer-a-banner-year/

https://www.sec.gov/Archives/edgar/data/1053650/000114420415047961/v417702_sc13d.htm

http://omegaprotein.com/omega-protein-announces-acquisition-of-bioriginal-food-science-corp-expanding-depth-in-human-nutrition/

http://omegaprotein.com/omega-protein-adds-concentration-capabilities-with-its-strategic-acquisition-of-incon-processing-l-l-c/

http://www.agwest.sk.ca/blog/posts/POS-acquires-US-distillation-facility.html

Daybrook Deal

            Daybrook Fisheries was bought by a South African fishing concern in 2015. Daybrook and Omega are the only two industrial menhaden operations on the Gulf Coast. Daybrook owns a reduction plant in Empire, Louisiana. It has about 35-40% market share and operates about half as many fishing vessels in the Gulf as Omega. Oceana Group, publicly-traded on the Johannesburg Stock Exchange, paid $382.3 mil. in cash for Daybrook. The deal valued the firm at approximately 8x EBITDA and 3x revenues. Investors noticed these high multiples as OME has typically traded at less than 6x EV/EBITDA and less than 2x sales. Oceana’s CEO has said publicly that he is pleased with the Daybrook deal so far and intends to increase menhaden production. He recently said that the company intends to increase its Gulf fleet by “another vessel or two”. Omega does not need the increased competition.   

            The Daybrook deal encouraged speculation that Omega would be sold. An analyst with Kansas City Capital Associates told Undercurrent News in 2015 that, “…Omega Protein is definitely next.” Prior to the Daybrook deal, investors placed a low probability on an Omega sale due to the American Fisheries Act of 1998 (AFA). This law restricts foreign ownership of vessels traveling between U.S. ports to 25%. Most of the potential acquirers of Omega are non-U.S. companies. Oceana got around the AFA by buying 100% interest in Daybrook’s processing operations but only 25% interest in its fleet of fishing boats. There is some risk to this strategy as the majority boat owners could run into financial problems. This structure was approved by the U.S. Maritime Administration.  

Activists Fight, Win, Sail Away

“Simple chanting of the mantra – “Daybrook / Oceana” by the Board once in the morning and again at night will keep you on the proper path…” – Nelson Obus’ letter to OME (8/11/15)

“Mr. Obus has sent numerous emails, often sent in the middle of the night, to Bret Scholtes, the Company’s President and Chief Executive Officer, and Omega Protein’s outside counsel, with insults and threats.” – OME press release (6/9/16)

            An activist shareholder targeted Omega Protein in 2015-16. In August, 2015, Nelson Obus’ Wynnefield Capital Management filed a 13-D and sent a letter to Omega’s board. Wynnefield was likely motivated by the surprisingly high price of the Daybrook deal. In the letter, Wynnefield stated that, “…the Omega Protein Board and its management have flushed away $150 million of shareholder value trying to enter a business that the Board and management lacked the skill sets to integrate, manage or execute on a successful strategic plan.” In September, 2015, Omega announced that its board had hired J.P. Morgan to review strategic alternatives. In November, 2015, Omega changed its bylaws to make it more difficult for outside shareholders to nominate board members. Wynnefield claimed that the changes created, “…both new hurdles and burdens on shareholder suffrage…” Soon after, Wynnefield became more hostile.

            Wynnefield wanted Omega to end its diversification strategy and sell the company. In March, 2016, Wynnefield announced that it would nominate three people for election to Omega’s board. It stated that, “The obvious solution is for Omega to exit the Human Nutrition business and to redeploy the proceeds into their profitable core business.” Omega opposed Wynnefield’s nominees and called the hedge fund, “a short-sighted investor with no long-term strategy”. Omega announced the completion of J.P. Morgan’s strategic review in May, 2016. The nine-month review did not result in much of anything. On a conference call, one analyst joked that, “…hopefully you are not paying by the hour for that.” Omega announced that, “…the continued execution of the Company’s strategy…represents the best path forward to maximize value for shareholders.” There was no change in strategy and no strategic buyer. The firm’s chairman said that there were, “…indications of interest from several financial buyers…none of the proposals provided adequate value…” The company announced a modest share repurchase program of up to $40 mil. over three years. Wynnefield was not impressed.

            Omega Protein issued one of 2016’s funniest corporate press releases. In May, 2016, Wynnefield won a small victory as Omega increased the size of its board and appointed one of its nominees. I suspect that Omega was motivated by self-interest: CEO Bret Scholtes was one of the board members who would have lost his seat if all three Wynnefield nominees had won. In May and June, Wynnefield and Omega issued dueling slideshows and press releases. Wynnefield got a boost as proxy advisory firms ISS and Glass Lewis supported its nominees. The fight got a bit nasty. One of Omega’s press releases included some humorous emails that Nelson Obus had sent to Omega’s CEO and general counsel. I reprint these emails for no other purpose than amusement:

            Wynnefield won its activist campaign and proceeded to head for the exits. The result of Omega’s 6/28/16 Annual Meeting was rather embarrassing for management as Wynnefield’s nominees outpolled Omega’s nominees by margins of more than 4-to-1. CEO Scholtes, who ran unopposed, kept his seat. One might think that Wynnefield would use its hard-won influence to push for a sale of the company. Instead, Wynnefield celebrated its glorious victory by dumping its stock. SEC filings show that Wynnefield sold over 1.6 mil. shares in the second half of 2016. The firm only held 100K shares at 12/31/16. Omega, it appears, was correct in its assessment that Wynnefield had no long-term plan for the investment.

JPM Gets Paid Again: Strategic Review #2

            Omega’s board has hired J.P. Morgan and BMO Capital Markets to perform another strategic review. On February 22, 2017, Omega issued a press release announcing that a new review would evaluate, “…internal value enhancing initiatives, a sale of the human nutrition business segment or certain of its assets…” The press release cautioned that, “There can be no assurances that this strategic review will result in any specific action…” So, it does not appear that Omega intends to sell the company, but it seems that Omega may exit the human nutrition business entirely. This is quite a reversal as this business was promoted as the future of the company for years. Omega’s management defended its human nutrition strategy throughout the Wynnefield campaign. I can only assume that Omega’s management has lost confidence in a turnaround. It is not clear why any buyer would have confidence in it, either.

Omega dropped its stock buyback plan when it announced the new strategic review. The press release stated that, “…the Company has suspended its previously announced stock repurchase plan.” It did not explain why Omega cannot repurchase stock and look for buyers for its human nutrition assets at the same time. Omega has no apparent need to hoard cash if it does not intend to invest in human nutrition. The irony here is that the stock repurchase plan was the only concrete announcement from the first strategic review. Omega did not repurchase any stock while the buyback was active.  

Will Omega Be Acquired?

I do not believe that Omega will be sold. There has been a lot of speculation about a sale since the Daybrook deal and Wynnefield pushed for a sale. If Omega is sold, potential acquirers could include Marine Harvest, Royal DSM, or Cargill. There is no indication, however, that any strategic buyers have been interested. Omega’s management admitted to investors at the ICR Conference in January, 2017, that no buyers emerged from the first strategic review.

Tim Ramey

“It’s fair to say if Herbalife is a pyramid scheme, then so is Amway, so is Nu Skin, so is Usana Health Sciences Inc. The answer is none of them are.” – Ramey, Bloomberg interview (2/10/15)

            Tim Ramey of Pivotal Research has been Omega’s biggest bull. Ramey was the only analyst with a “Buy” recommendation on OME until he downgraded it after Q4 2016 earnings were announced. Pivotal is an investment research firm with just four analysts. The firm is based in NYC, but Ramey lives on his winery in Oregon. Ramey worked as an analyst at D.A. Davidson from 2002-14 and joined Pivotal in late-2014. He has also worked as consultant to Post Holdings Chairman Bill Stiritz. Ramey’s coverage list includes Herbalife, Nu Skin, USANA, Flowers Foods, and Post.

            Ramey has a long relationship with Omega. He covered the firm while working at D.A. Davidson and was a big proponent of Omega’s acquisitions in human nutrition. He had strong motive for doing so as D.A. Davidson advised Omega on the deals. Ramey immediately picked up coverage on Omega when he joined Pivotal in 2014. In his initiation report, he highlighted the Bioriginal deal and the transition to human nutrition. He wrote that, “It (Omega) is quickly morphing from its past as a rust-bucket company operating in an ever-dwindling and always volatile menhaden fishery.” Ramey defended Omega’s management during the 2016 activist campaign and dismissed problems with the human nutrition business. In a January, 2016, report, he wrote that, “Over time, Human Nutrition will be a much greater share of the total business with higher margins, higher returns, and reduced volatility.” A few months later, Omega’s Q1 conference call included this management-friendly exchange:  

<Q - Timothy S. Ramey>: So, other than the sort of crying over spilt milk, we paid $160 million for these assets, maybe they're only worth $100 million if we try to monetize them today. I mean, we're just kind of done here, aren't we? It's sort of – it seems to me your analysis is correct. And if you're right and I have no reason to believe you're not, if Bioriginal is the majority of that business, we did in two minutes what your committee did in nine months. Let's buy back some stock and move on.

<A - Bret D. Scholtes>: I agree with you. 

            Ramey has reversed himself and given up on the human nutrition strategy. For years, he argued that Omega had little choice but to diversify into human nutrition. He has, in fact, written that menhaden fishing is “shrinking” and in “secular decline”. He cannot, however, ignore the poor results from the human nutrient business. In his 11/3/16 report, he admitted that, “Human Nutrition continues to resemble a slow-motion car crash.” He was still somewhat hopeful at that time, but not anymore. In his 3/2/17 report, he wrote that, “Human Nutrition remains a disaster and will be sold, parted-out or closed.” He downgraded the stock from “Buy” to “Hold” and lowered his price target from $30 to $24.

Ramey has promoted MLMs in questionable ways. He has often defended and promoted controversial companies like Nu Skin and USANA. He is best known, though, as one of the most bullish analysts on Herbalife. Most investors are aware of Bill Ackman’s long battle to prove that Herbalife is an illegal pyramid scheme. Ramey has attacked Ackman and promoted Herbalife in numerous news articles, analyst reports, conference calls, and TV interviews. It is true that there is nothing unusual about an analyst promoting a stock. Ramey, though, had some blatant conflicts of interest that were not disclosed until CNBC’s Melissa Lee asked about them in an interview. The first of these was that Ramey personally owned stock in Herbalife. Many research groups do not allow analysts to own stocks of companies that they cover. The second conflict was that Ramey worked for Post’s Bill Stiritz both before and during his employment at Pivotal. Stiritz, as it happens, owned over 8% of Herbalife in 2014-15 and suffered paper losses of as much as $200 million. The third conflict of interest was that Ramey, weirdly enough, was a Herbalife Distributor. He claimed that he bought product, “…for my own use, not for resale and I have no ‘down-line’.” In a 2015 interview, well-known short seller Marc Cohodes called Ramey one of the worst analysts on Wall Street.

http://firstadopter.tumblr.com/post/113120015764/interview-with-marc-cohodes-famous-short-seller

http://www.businessinsider.com/melissa-lee-calls-out-tim-ramey-2014-11

Environmental Laws

            Omega has paid fines for illegal pollution. In 2013, the company plead guilty to two violations of the federal Clean Water Act. For years, Omega had illegally discharged fish waste and caustic chemicals in Chesapeake Bay. Omega paid a $7.5 mil. fine and was placed on probation for three years. Omega’s spokesperson blamed the violations on “confusion” about the regulations and said, “Moving forward, ensuring that our vessels are in full compliance is our top priority.” Omega, though, did not clean up its act. In December, 2016, Omega plead guilty to two new violations of the Clean Water Act. This case related to two instances in which a plant manager at Omega’s Louisiana facility had ordered employees to illegally dump wastewater into the Vermilion River. Omega paid a $1.2 mil. fine and got placed on probation for a second time.

            Omega’s violations of the Clean Water Act have led to other legal problems. In 2010, the company took out a loan that was guaranteed by the Department of Commerce. A provision of the loan required that Omega claim compliance with federal environmental laws. In October, 2016, Omega was notified by the Department of Justice (DOJ) that it was under investigation in connection with the False Claims Act. The False Claims Act is used to penalize individuals and companies that defraud the government. Further, in December, 2016, Omega was notified that it was under investigation by the Securities and Exchange Commission (SEC). The company did not disclose anything about this investigation until it filed its 10-K on 3/1/17. Omega has disclosed very little about this case. It appears that it relates to its probation violations and its treatment of a whistleblower in the Louisiana pollution case. Omega admits that damages from the DOJ and SEC investigations could be “material”.

http://www.theadvertiser.com/story/news/2017/01/24/omega-protein-fined-1-million-river-discharge/96994308/

http://www.bayjournal.com/article/omega_gets_7.5_million_fine_probation_for_violating_clean_water_act

https://www.justice.gov/usao-edva/pr/fish-processing-company-omega-protein-inc-sentenced-environmental-crimes

Labor Problems

“They have to come in legally, and then they go back. Certain areas, in really successful areas, where we can’t get help, many people do that. That’s a good thing. Otherwise, you hurt your business.” – Trump, explaining his hypocritical use of H-2B visa workers, New York Times (2/25/16)

https://www.nytimes.com/2016/02/26/us/politics/donald-trump-taps-foreign-work-force-for-his-florida-club.html?_r=4&referer=

“They (firms that use H-2B visas) do not feel and maybe strictly speaking they have no loyalty to the other American workers. Their loyalty I suppose is their bottom line and their stockholders but somebody needs to be concerned about America…” – Sen. (now AG) Jefferson Beauregard Sessions III, Senate testimony (6/8/16)

https://www.c-span.org/video/?410790-1/senate-hearing-examines-effects-h2b-visa-program

            Omega faces a possible labor shortage due to its dependence on foreign workers. Omega, like dozens of other seafood companies on the Gulf Coast, uses temporary labor during the main fishing and processing season (spring to fall). Most of these laborers come to the U.S. from Mexico under the H-2B visa program. More than 2,000 Mexicans, known as “Louisianeros”, receive H-2B visas to work in the seafood industry in Louisiana alone each year. The H-2B program, by many accounts, is rampant with fraud and abuse. Industry participants have been accused of everything from selling visas to stealing wages to lying on Department of Labor (DOL) applications. Indeed, a recruiting firm used by Omega and other companies was indicated for fraud in 2014. The firm had to sue the DOL in 2015 to force it to accept its visa applications. The immediate problem for Omega is that visa approvals from the DOL have slowed considerably in the past few years.

Omega faces an uncertain labor situation. It seems likely that if Omega cannot get enough Mexican workers, it will have to hire U.S. citizens at higher wages. CEO Bret Scholtes, though, downplayed the labor risk on Omega’s Q4 2016 earnings call. He claimed that, “…we do access a visa program which allows us to hire experienced fishermen from outside the United State to come work for us during the fishing season. It’s not an opportunity to reduce cost.” He implied that Omega might get its Mexican workers a little late, but would still get them. In its 2016 10-K, however, Omega disclosed that, “Based on its current assessment of the 2017 H2B visa application process, the Company believes that it may not have sufficient H2B visa workers for the 2017 fishing season that commences in April 2017. [Held to update]” Yes, “[Held to update]” actually appears in Omega’s 10-K on EDGAR. It appears that the company may not know how it will staff its boats and plants this year.

The Trump Administration’s policies put the future of the H-2B program in doubt. Pres. Trump has used H-2B workers at Mar-a-Lago and some of his other properties for years. He has also repeatedly claimed that Mexican workers take jobs from Americans. So, his view of the H-2B program is unclear. Attorney General Jeff Sessions, though, definitely hates the program and may make efforts to restrict it. Trump’s election actually led to a reduction in the H-2B program before he even took office. In December, 2016, Republicans in Congress abandoned part of the H-2B program known as the “Returning Working Exemption”. This change reduces the number of available foreign laborers in 2017. So, there could be plenty of job openings for all those Americans who want temporary minimum wage jobs in fish processing plants on the sweltering Gulf Coast.

https://www.buzzfeed.com/jessicagarrison/the-new-american-slavery-invited-to-the-us-foreign-workers-f?utm_term=.lujrl3AaD#.yyMWRrEg1

http://law.justia.com/cases/federal/district-courts/north-carolina/ncmdce/1:2014cv00231/65373/38/

http://thehill.com/homenews/news/309053-trump-will-again-hire-foreign-workers-to-staff-private-resort-in-florida

Safety Issues

            Omega has a poor safety record. Some of these violations have resulted in worker deaths. In April, 2012, a 24-year old employee at Omega’s Moss Point, Mississippi, plant was horrifically killed when he was dragged into a conveyor. The Occupational Safety and Health Administration (OSHA) fined the company $79,200 and cited it for 25 health and safety violations, including 21 categorized as “Serious”. In another incident at Moss Point, one welder was killed and another was seriously injured when a storage tank exploded in July, 2014. The two workers were contractors who did not know that the tank contained explosive methane and hydrogen sulfide. OSHA hit Omega with $139K in fines and 13 citations, including one categorized as “Willful”. OSHA noted that Omega was a repeat offender and that it, “…violated safety regulations that could have prevented the tragedy.” Omega has had incidents on its boats as well. In 2011, one of its fishing boats crashed into a large cargo ship and sank. Three fishermen died. In 2014, two workers were injured when an Omega vessel twice struck a moored Omega vessel. Many of Omega’s accidents resulted in lawsuits that were settled out of court. OSHA has cited the firm 77 times since 2005. Daybrook, for comparison, has just two citations on record.

https://www.osha.gov/ooc/citations/OmegaProtein_989340_0121_15.pdf

https://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=NEWS_RELEASES&p_id=27249

http://www.sunherald.com/news/local/counties/jackson-county/article56912658.html

A Few More Risks

“Research through the NOAA-USDA Alternative Feeds Initiative has accelerated progress toward reducing fishmeal and fish oil use in aquaculture feeds…developing alternatives has reduced reliance on wild fish for this purpose.” – National Oceanic and Atmospheric Administration (2017)

http://www.nmfs.noaa.gov/aquaculture/faqs/faq_feeds.html

            Omega has a long list of risks. The “Risk Factors” section of Omega’s 10-K is very long, but not comprehensive. Here are a few notable risks that I have not discussed at length (this report is too long already):

·         Substitutes for fishmeal and fish oil. The higher prices of fishmeal and fish oil have encouraged substitution. Numerous groups and companies are developing and promoting alternative sources of protein for aquaculture (e.g. soy, insects, seaweed). Omega competes with many firms, including such agribusiness giants as ADM and Cargill. Substitution on a large scale has already occurred in the livestock feed industry. For more information on this topic, investors might want to look at a microcap company called TerraVia (symbol: TVIA). It is developing algae products for aquaculture and other markets.

·         Laws. Bills have been introduced in Congress to ban large-scale menhaden fishing in the Atlantic. None of them have passed, but new bills could be introduced. Maryland has also proposed laws to protect Chesapeake Bay and its crab industry.

·         Hurricanes. Omega’s reduction plants and fishing operations are exposed to hurricanes in the Gulf of Mexico. Its plants were severely damaged by Hurricanes Rita and Katrina in 2005 and Hurricane Ike in 2008. A strong hurricane in the wrong place at the wrong time could wipe out a large amount of an annual harvest.

·         Environmental destruction. Omega is at risk from flooding, global warming, oil spills, and other environmental problems. Coastal erosion is occurring in Louisiana at an alarming rate. NOAA projections indicate that most of southeastern Louisiana will be under water by the year 2100. Louisiana has already lost 2,000 square miles of land in the past 80 years. The state was hit with catastrophic floods in August, 2016.

·          Aquaculture risks. The growth in aquaculture has been the main driver of the fishmeal and fish oil industries. This growth may not be sustainable. Problems with aquaculture include fish illnesses, water pollution, and limitations on available fresh water and energy.

·         Trade restrictions. Exports represented 46.9% of Omega’s 2016 revenues. China, especially, has been a big growth area for aquaculture. The Trump Administration is hostile to international trade. Tariffs or other trade barriers could encourage international customers to buy fishmeal and fish oil from companies in South America and elsewhere.

·         Energy costs. Omega has benefitted from the relatively low cost of diesel and other fuel. An increase in energy costs would hurt profitability. The company hedges these costs to some degree. Omega also limits diesel expenses by fishing close to the shore. Costs would increase if it had to go out further into the ocean to find menhaden. Many of Omega’s vessels are very old. Some of them date to World War II.

Insider Trading

            There has been no open market insider buying of OME stock in a long time. CEO Bret Scholtes and CFO Andrew Johannesen made a couple of small buys in 2011 and 2012, but nothing since. There has been no insider buying at all since 2013. Meanwhile, there have been dozens of stock sales from directors and execs. Johannsen sold nearly $500K worth of stock in the 2^nd half of 2016 alone.

2016 Results

            Omega reported its highest-ever revenues and earnings in 2016. The company reported EPS of $1.46 on $390.8 mil. in revenues. Operating income was $53.6 million. Omega, like many companies, reports adjusted (non-GAAP) numbers. Omega had several “extraordinary” expenses in 2016, including goodwill impairments and losses from the shutdown and sale of InCon. Its 2016 adjusted EPS was $2.01 and its adjusted EBITDA was $95.3 million. In 2015, Omega reported $359.3 mil. in revenues, adjusted EPS of $1.50, and adjusted EBITDA of $79.6 million. There are approximately 22.5 mil. shares outstanding. Omega exited 2016 with $37.4 mil. in cash and no long-term debt. BV is approximately $15.00 / share and tangible BV is approximately $12.60 / share.

Valuation

            Omega Protein has usually traded at low earnings multiples. OME often trades at typical multiples for a cyclical, commodity-based business. In its history as a public company, OME has often traded at EV/BV and EV/Sales ratios below 1.0x and P/E ratios below 12x. OME’s EV/EBITDA ratios are typically in the 5-7x range. OME’s earnings multiples have expanded in the past few years. Prior to the recent sell-off, P/BV peaked at 1.7x and EV/S peaked at about 1.4x. The current EV is approximately $400 mil., so OME is trading at about 1.2x P/BV, 1.1x EV/S, 1.5x P/tangible BV, and a P/adj. E of 10x. The current EV/adj. EBITDA of 4.2x is not high. It is important to remember, however, that 2016 was the best year in Omega’s history. In 2012, Omega’s adjusted EBITDA was only $35.6 million. So, despite increasing losses from human nutrition, adjusted EBITDA was 168% higher in 2016 than it was just four years earlier. The current market price for fishmeal is about the same as it was in 2012.

            Omega’s recent margins may not be sustainable. In the last three years, Omega has reported gross margins in the 25-30% range, EBITDA margins in the 22-26% range, and EBIT margins in the 15-20% range. These are relatively healthy margins. In 2012, Omega reported a gross margin of 18%, an EBITDA margin of 15%, and an EBIT margin of 7%. OME traded as low as $6.00 in 2012. Comparable companies to Omega typically report EBIT margins in the high single-digits.

Model

            Omega does not provide any forward guidance. Projections are difficult because the fish catch and future market prices are unknown. There are currently three sell-side analysts with earnings projections on Bloomberg. The analysts project that Omega will not match 2016 revenues and earnings in 2017. They do, however, anticipate higher numbers in 2018 than in 2017. The consensus revenue estimates are $370.0 mil. for 2017 and $379.3 mil. for 2018. The consensus EPS estimates are $1.68 for 2017 and $1.85 for 2018. The consensus EBITDA estimates are $85.2 mil. for 2017 and $90.3 mil. for 2018. I believe that the analysts’ numbers are too high because I expect that prices will fall further. I predict that 2017 EPS will be below $1.50 and that 2018 will be worse.

Price Target

            My twelve-month price target on OME is $12.50. This target is based on 1x BV, 7x my 2017 EBITDA estimate, and 8.5x my 2017 EPS estimate. OME has traded well below 1x BV in the past. Omega has $37.4 mil. in cash (about $1.64/share). I assume that the human nutrition business is worth about 0.5x sales or $3.00/share ($70 mil.) and the animal nutrition business is worth about 1.0x sales or $9.50/share ($220 mil.). I seriously doubt, however, that anybody wants to spend $70 mil. to buy Omega’s human nutrition business.

Risks to Short Thesis

            Omega is not in any financial distress. There is no reason to believe that the company will go out of business. My argument is that the last three or four years have been unusually good. OME was under $10 as recently as December, 2014. Still, there are legitimate reasons that investors might be bullish, including:

·         Pricing rebounds due to supply problems or increasing demand

·         Fish catch comes in higher than expected or fish quota is eliminated

·         Growth of aquaculture

·         Growth of health products / Omega-3

·         Worldwide shortage of seafood pushing pricing up

·         Human nutrition business reverses weak trends

·         Human nutrition business is sold

·         Company returns more cash to shareholders

·         Trades at low earnings multiples

·         Healthy balance sheet with zero long-term debt

Summary

            Omega has had a few good years, but this is not a growth business. The company has benefitted from strong pricing for fishmeal and fish oil over the past few years. This trend may be ending as prices have begun to fall. The reality is that menhaden fishing is a business with negative long-term prospects. Omega’s efforts to diversify into human nutrition have failed. OME may be a better short in the mid-$20s than it is today. My 12-month price target is $12.50.

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author has a position in this stock and may trade this stock.