Phibro Animal Health (PAHC) is a fallen angel with turnaround prospects; its customers include livestock producers, farmers and veterinarians, explains Hilary Kramer, editor of Value Authority.
The company develops and manufactures products that maintain and enhance the health of livestock, such as poultry, beef and dairy cattle, and swine. The company sells more than 1,625 products to 3,725 customers in 80 countries.
Phibro divides its operations into three segments:
- Animal Health sells antibacterials, anticoccidials that stop the spread of parasites, nutritional specialty products and vaccines. This segment accounted for 66% of sales and 83% of operating income in fiscal 2021.
- Mineral Nutrition sells trace minerals including zinc, manganese, copper and iron used to fortify animals’ diets. This segment accounted for 26% of sales and 11% of operating income in fiscal 2021.
- Performance Products is a small segment that makes industrial chemicals and personal care products for human consumption. This segment accounted for 8% of sales and 6% of operating income in fiscal 2021.
The stock had its IPO on April 10, 2014, at $14 a share. The stock initially did very well, reaching a peak of $54 in July 2018. Some had envisioned PAHC as a potential growth company, as demand for additional meat from Asian countries with a growing middle class would benefit the overall veterinary space.
However, the growth story did not materialize and the stock retreated. Even so, while Phibro is not growing at fast rates, it has realized consistent earnings, and it is now attractively valued at 16X a reasonable estimate of $1.32 for the June 2021 fiscal year.
Furthermore, there are some encouraging signs that anticipated growth will start to kick in now. Revenue in the first quarter of fiscal 2022 was strong at 10.2% expansion, driven by a strong market for vaccines as well as demand for cattle and poultry products in foreign markets.
While EPS after adjustments declined in the quarter 8% (reflecting supply chain costs and increased investments for future growth), the company has started to implement price increases and surcharges that will boost profitability in fiscal 2022 from the $1.27 per share earned last year.
Another potential source of growth will come from the company moving into the domestic pet care market. Phibro recently introduced Rejensa, a supplement to improve animal joint health.
The company feels that the product can be a big winner, with an active ingredient (Gluco Blu) that has proven superior in tests to current products that use glucosamine, the traditional active ingredient used in the market leader. Cosequin.
Shares of PAHC have done well since my recommendation. The next catalyst could come from fiscal second quarter earnings that will be released on February 9. Expectations are for flat EPS of $0.34 on a 5% increase in revenue as higher costs from increased wages and supply chain issues will limit margin expansion.
However, given the top-line momentum, I feel the numbers have a chance to surprise to the upside. Keep in mind the stock traded as high as $31 on July 1, so I believe even a minor surprise on the upside could bring a major lift here.
In summary, I think Phibro Animal Health has good risk/reward characteristics at the current price. The stock sells close to a 20% discount to a market P/E, top-line trends are good and price pressures impacting earnings will subside. PAHC is a buy below $20.50. My target is $25.
