In 2004, when Martek Biosciences ( ) was a high-flying growth stock, I had the opportunity to meet with the CFO. While what they did sounded real interesting, I walked out of that meeting wishing that I worked at a place that could short stocks. Long story short, the company was way overly optimistic regarding the prospects for continued growth. Since then, they have been in my almost permanent "penalty box", but a recent appearance on a few of my screens convinced me to spend some time refreshing myself. I am glad that I overcame a bias of permanently labeling a company or management team, and I believe I have uncovered a pretty decent growth story. Here is what I like:
- Recession resistant
- Healthcare name with zero Obama exposure
- Strong Financials and FCF generation
- Valuation bordering on deep value despite growth potential
- The chart looks good
- DHA play is very timely
For those not familiar with Martek, they are all about DHA, the amino acid that has been proven to offer cardiovascular and cognitive benefits. I personally can testify to the cardiovascular side, though I get mine through fish oil. Martek uses a biotech process to create DHA from algae, offering the benefits of avoidance of both mercury exposure and a fishy taste. The major catalyst for the company's growth earlier this decade was the rapid adoption by the oligopolistic baby formula industry of Martek's DHA. Back in 2004, the company was very excited about the opportunity to add it to other types of food, but I correctly expected that this would be a much more challenging endeavor. The company not only failed to gain traction quickly, but they also paid the price for relying upon an Italian sole-source supplier of a critical ingredient when their power failed at about the same time as a fire destroyed a warehouse in New Jersey as well as several capacity issues. The stock fell from its peak of 70 or so in 2003 to a recent March low of 15 before rebounding to 23 or so.
Despite taking much longer to break into the functional food business than they had expected, the company has gained traction and has its DHA in many products, including dairy products like yogurt, milk, and soymilk, juices, and baked goods. Baby formula related sales still remain the vast majority of revenue, but supplements and additives are growing rapidly. Expanding international penetration is another growth driver. While the recent reset shows that the company isn't recession-proof, I do believe that it is resistant. The set back was due to inventory destocking at formula manufacturer customers. Nevertheless, sales should be flat in 2009 with EPS slightly higher.
