Neogen (NEOG)

Life sciences company Neogen (NASDAQ:NEOG) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 3.4% year on year to $221 million. The company’s full-year revenue guidance of $895 million at the midpoint came in 1.7% below analysts’ estimates. Its non-GAAP profit of $0.10 per share was 13% below analysts’ consensus estimates.

Company Overview

Founded in 1981 and operating at the intersection of food safety and animal health, Neogen (NASDAQ:NEOG) develops and manufactures diagnostic tests and related products to detect dangerous substances in food and pharmaceuticals for animal health.

The medical devices industry operates a business model that balances steady demand with significant investments in innovation and regulatory compliance. The industry benefits from recurring revenue streams tied to consumables, maintenance services, and incremental upgrades to the latest technologies. However, the capital-intensive nature of product development, coupled with lengthy regulatory pathways and the need for clinical validation, can weigh on profitability and timelines. In addition, there are constant pricing pressures from healthcare systems and insurers maximizing cost efficiency. Over the next several years, one tailwind is demographic–aging populations means rising chronic disease rates that drive greater demand for medical interventions and monitoring solutions. Advances in digital health, such as remote patient monitoring and smart devices, are also expected to unlock new demand by shortening upgrade cycles. On the other hand, the industry faces headwinds from pricing and reimbursement pressures as healthcare providers increasingly adopt value-based care models. Additionally, the integration of cybersecurity for connected devices adds further risk and complexity for device manufacturers.

Neogen's competitors in the food safety testing market include bioMérieux (EPA:BIM), Thermo Fisher Scientific (NYSE:TMO), and PerkinElmer (NYSE:PKI). In the animal safety segment, the company competes with Zoetis (NYSE:ZTS), Elanco Animal Health (NYSE:ELAN), and Merck Animal Health, a division of Merck & Co. (NYSE:MRK).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $906 million in revenue over the past 12 months, Neogen is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Neogen’s sales grew at an impressive 16.7% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Neogen’s annualized revenue growth of 12.1% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Neogen missed Wall Street’s estimates and reported a rather uninspiring 3.4% year-on-year revenue decline, generating $221 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

Although Neogen was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 5.7% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Looking at the trend in its profitability, Neogen’s operating margin decreased by 64.6 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 52.7 percentage points. This is due to a large impairment charge in the last 12 months.

This quarter, Neogen generated an operating profit margin of 2.5%, down 2.8 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Neogen, its EPS declined by 7.5% annually over the last five years while its revenue grew by 16.7%. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Neogen’s earnings to better understand the drivers of its performance. As we mentioned earlier, Neogen’s operating margin declined by 64.6 percentage points over the last five years. Its share count also grew by 105%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Neogen reported EPS at $0.10, down from $0.12 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Neogen’s full-year EPS of $0.38 to grow 34.2%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Neogen broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Neogen’s margin dropped by 20.8 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Neogen historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.4%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Neogen’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Neogen posted negative $305 million of EBITDA over the last 12 months, and its $893.1 million of debt exceeds the $127.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

We implore our readers to tread carefully because credit agencies could downgrade Neogen if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Neogen can improve its profitability and remain cautious until then.

We struggled to find many positives in these results. Both its revenue and EPS missed Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 6.3% to $6.58 immediately following the results.

Updated: July 10, 2025 at 12:34 AM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Neogen, you should also grasp the company’s longer-term business quality and valuation.

We see the value of companies making people healthier, but in the case of Neogen, we’re out. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. On top of that, the company’s declining EPS over the last five years makes it a less attractive asset to the public markets.

Neogen’s P/E ratio based on the next 12 months is 10.8x. At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $7.50 on the company (compared to the current share price of $5.45).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.