Description

Omega Protein fishes for menhaden (a species similar to herring) and processes the fish into fishmeal and oil. In 1998, the company earned $1.10 per share - and the shares sold as high as $18.50. Since 1998, the prices for meal and oil have fallen to unusually depressed levels - as has the price of Omega Protein's shares. In spite of Omega Protein's financial and operating strengths, its shares currently are selling at only .59X its hard book value of $5.39 per share. Once the prices of meal and oil return to more normal levels, we believe that Omega Protein will earn at least $1.00 per share - and we would estimate that the shares would then sell above $10. Furthermore, should Omega-3 fatty acids (one of the company's products) be approved by the FDA for its efficacy in preventing heart disease, the shares would be worth far more than $10.

Omega Protein was founded in 1878 by the Haynie brothers, who built a fish processing business. Zapata (the company founded by former President George Bush) purchased Haynie in the late 1970's. In April 1998, Zapata took Omega public, selling 5.2 million of its own shares and 4.6 million newly issued shares at $16 per share. The funds raised in the IPO is a reason why Omega has a very strong balance sheet (cash approximates debt).

Omega owns 32 airplanes that are used to spot schools of menhaden in the Gulf of Mexico and the Atlantic Ocean, 65 fishing vessels that are used to net the menhaden, and 4 processing plants that convert the menhaden into a variety of fish meal and oil products. The meals mainly are used in fertilizers and animal feeds. Soybean meal is the key competitor - and the price of fishmeal is linked to the price of soybean meal. The oils are used as cooking oils and as an ingredient in margarine, baked goods, etc. (key competition are corn, soybean, and other vegetable oils). Omega dominates the domestic menhaden fishing and processing business - with a market share estimated at 80%.

Menhaden oil is rich is Omega-3 fatty acids. Scientists have observed that people who regularly eat fish that are rich in fatty acids are less prone to heart disease (the Japanese and Eskimos are examples of this). More specifically, Omega-3 fatty acids contain EPA (eicosapentaenoic acid), which is known to reduce serum cholesterol and low-density lipoprotein levels in the blood (detailed information on Omega-3 fatty acids can be found in several scientific articles on the Internet). In 1997, after a major effort by Omega Protein, the FDA approved the safety of processed Omega-3 for use in foods. The company is now working to have Omega-3 approved for its efficacy. In the meanwhile, small quantities of Omega-3 based products are being sold in health food stores, etc. Currently, most of the oils sold by Omega Protein are "crude" oils that sell for commodity-like prices. Omega-3 products are upgraded, highly specialized oils that enjoy high prices and margins. If the demand for Omega-3 fatty acids increases sharply, Omega Protein's normalized earnings would greatly exceed the $1.00 level.

The price of fishmeal and oil is linked to the price of vegetable meal and oil, which in turn is linked to the price of soybeans and corn. In the fall of 1998, the prices of soybeans and corn fell to abnormally depressed levels - and these poor market conditions have continued. Corn and soybeans are commodities - and it is logical to assume that their prices will return to more normal levels in due course. Because grain inventories have declined to reasonably low levels, there is optimism that the prices for corn and soybeans will improve markedly in the near future. In 1998, Omega Protein earned $1.10 per share under conditions where it caught 602,000 tons of fish and where meal prices were normal and oil prices somewhat above normal. Since then, the company has reduced its costs. Present capacity is about 700,000 tons of fish. Our estimate is that, once prices return to normal, the company should earn at least $1.00 per share.

Catalyst