Wednesday, July 13, 2011

Omega is another fair value play

Omega Protein Corp fair value target is $15.50, using Benjamin Graham's magic formula.

In the news last month, OME was selected to join the Russell 3000 Index on June 24th.

According to 10K
Omega Protein’s principal raw material is menhaden, a species of fish that inhabits coastal and inland tidal waters in the United States. Menhaden usually school in large, tight clusters and are commonly found in warm, shallow waters.

Omega Protein is the only fully-integrated fish oil processing operation in the United States that both directly conducts fishing operations and also manufactures highly refined EPA and DHA from these marine resources. Omega Protein can control the purity and quality of its product from harvesting all the way through manufacturing and shipment.

Menhaden oil currently is the only marine source of long-chain Omega-3’s directly affirmed by the FDA as a Generally Recognized As Safe (or “GRAS”) food ingredient for direct human consumption. The FDA has approved menhaden oil use in 29 different food categories such as margarine, salad dressings, condiments, yogurt, ice cream, cheese, prepared meats, sauces, soups, crackers, cookies, cereals and bakery products.
According to 10Q
A finding by the ASMFC that overfishing occurred in the Atlantic menhaden fishery in 2008 may result in additional restrictions on Omega Protein’s menhaden harvest, which could have a material adverse effect on the Company’s business, financial condition or results of operations.
The Atlantic State Marine Fisheries Commission ("ASMFC") manages the menhaden fishery throughout the stock’s Atlantic coast-wide range.... 
In March 2011, the ASMFC initiated a review regulatory process which if enacted would: (1) require annual updates on menhaden recruits, or the numbers of fish in their first year of life, currently reviewed only every three years; (2) begin a process of developing management reference points for identifying the relative status of the stock using broad ecosystem indicators; and (3) establish interim management targets and consider regulatory tools to assist managers in achieving these targets. The interim management reference point target will be based on achieving 15% of the spawning potential the Atlantic menhaden stock would have if such stock were unfished. By comparison, in 2008, the estimate of this so-called “spawning potential ratio” was estimated to be 9%; however, those numbers have not been estimated for 2009 and 2010. The Company expects that such reassessment will not occur until the next stock assessment in 2012. 

Adding this equity to the index gave it a pop of 5%-10%. I am going to put this on a watchlist to see if there are any minor unanticipated setbacks.  Historically, the 2nd and 3rd quarters are seasonally the best for them.

This document supports the recommendation of the Assessment Team that the stock status
determination is “not overfished” and there is “no overfishing”. But if there are any adverse judgement from ASMFC this equity could incur they will not be assessed until 2012.

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