Stock of the Day
Nov 05, 1999
AgriBioTech: Dressed up for a Buyer
Analyst: Bob Hirschfeld 11/5/99
Two years ago, AgriBioTech (NASDAQ:ABTX - news) set out to consolidate a section of the agricultural seed industry.
As the company commenced buying out the industry?s smaller players, shares rose . . . and rose . . . and rose. From the beginning of 1997 until the summer of 1998, the stock soared from $3 to $30.
Smelling fat banking fees, Wall Street analysts started singing the company?s praises. Then-chief executive Johnny Thomas boldly predicted that he could get $70 a share for his company in an eventual buyout.
Too bad it didn't last.
Today, the stock sells for a fraction of its peak price. Thursday, the stock closed at $3.44, up $0.06 for the day. But, the shares are off 74% for the year to date.
As it turned out, Thomas was more astute at buying businesses than building profits.
Given the current stock price, a strong case can be made that the shares will rise again. Not to $70. Not to $30. But maybe to $10, provided a buyer is found.
Recently, the company has been buying and consolidating forage and turf grass seed companies, and it currently controls about a 45% share of the $1.1 billion industry.
The company owns research facilities, seed processing plants, and an international distribution and sales network. It also owns the leading mass merchant turf grass seed business, selling through Home Depot (NYSE:HD - news) and Lowe's (NYSE:LOW - news) .
One marquee product is an improved variety of alfalfa that, if widely used, would provide $600 million in value-added both by offering a higher yield and greater insect protection.
Analyst E. Berry Summerour of Stephens Inc. has noted, numerous acquisitions have taken place in the biotechnology/seed sector over the past two years, some at multiples as high as seven times revenue. In a recent example, DuPont (NYSE:DD - news) bought the 80% of Pioneer-Hybrid (NYSE:PHB - news) it doesn't yet own for five times revenue.
AgriBioTech had $370 million in revenue for its June 1999 fiscal year, which means that shares are currently trading at only 50% of sales.
Even if a conservative multiple of only two times sales is used, investors could make a quick "four bagger" on a sale of AgriBioTech.
Former CEO Thomas is long gone, and the new management team that's picking up the pieces of his failed strategy have stated their intention to sell the company.
But the management team has some work to do.
For fiscal 1999, which ended in June, the company lost $1.22 per share on a diluted basis. Results were hurt by numerous charges, including a restructuring charge, a one-time loss on early debt redemption, and inventory write-offs. The company had a negative cash flow of $12.7 million, compared to a positive $6.4 million for fiscal 1998.
Summerour refers to the fourth quarter of fiscal 1999 as the "clean-up quarter," after which the company's reports will "start afresh."
Management, in fact, is on record that special charges in fiscal 2000 are not expected to exceed $1 million.
The new chief executive Richard Budd notes that all five of his goals have been met - sales are improving, margins are strengthening, operating expenses are shrinking, high-interest short-term debt is being paid off and long-term financing is being arranged.
For example, the company just announced that GE Capital arranged a lending syndicate to provide a $115 million line of credit and a term loan of $20 million. That should help tide the company over.
Unfortunately, in the near-term, the stock may stay range-bound. A late harvest created a condensed selling season, which will push sales from the traditionally strong September quarter "the first of fiscal 2000" to the December quarter. That indicates that the current fiscal year will start, unfortunately, with red ink on the bottom line.
In addition, weak demand has caused prices to dip 10%, which all but insures at least 10% lower sales for the first quarter.
Bottom Line:
Shares of AgriBioTech trade 20% under book value, and while they may not perk up for a quarter or two, they could double or triple over the next year if the company can find a suitor.
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