Do You Have the Guts to Play the Stock Market Casino?

Earnings season can be heaven or hell for a company. With extreme volatility, some companies may witness 10% of their market capitalizations evaporate within minutes. Many times, however, reactions to earnings announcements do not reflect a company's true value.

One example that I love to use is Netflix NFLX, which was once Wall Street's golden stock. During the last several quarters, Netflix would continuously miss analysts' estimates, and accordingly, its stock would decline. However, it would rebound soon after, often creating new yearly highs. Not every stock is comparable to Netflix, however.

On September 27, Neogen Corporation NEOG released the earnings report for its first quarter. It reported actual EPS as $0.25 versus an analyst consensus of $0.27. It also reported actual revenues of $45.7 million versus an analyst consensus of $47.1 million. The stock gapped down in early trading, and has declined over 11% during the trading session.

While the company failed to beat analyst expectations over the last three months, is its latest report a definite sign of future demise? Investors will never know exactly without access to material information, but using the company's historical performance may indicate the likelihood of an earnings rebound.

From a quarter-over-quarter perspective, Neogen's revenues have been consistent over the last 4 quarters. Ranging from $42-44 million, Neogen's last quarter experienced $44 million in sales. Over the same period, cost of goods sold and operating revenues stayed consistent as well. Most recently, the firm's net income was $6 million, marking its highest figure over the last five quarters. When looking at the income statement's numbers, fluctuation seems prevalent. What this may mean is that the company is very dependent on the economic environment. The last few months were very negative globally, which may have hindered Neogen's selling capabilities in the short-term.

The company's cash position decreased drastically in the last quarter, from about $48 million to $36 million. However, it also gained $20 million in short-term investments. Also factoring in receivables and inventories, the company's current assets increased by $10 million. Property, plant, and equipment increased from $0 to $41 million, which may mean that Neogen is planning large expansion. While huge capital expenditures rebalance the company's books, sometimes in an unfavorable manner, it can be extremely beneficial by increasing revenues.

Neogen's current liabilities decreased slightly: payables slightly increased from $7 million to $9 million while accrued liabilities decreased from $8 million to $3 million. Its non-current liabilities increased slightly, as deferred taxes increased by $2 million. Ultimately, total liabilities were stagnant over the last two quarters and decreased from the quarter before that. Retained earnings and paid-in capital both increased with no other capital raises, increasing shareholders' equity.

Neogen's cash flow from operations increased over the last four quarters. As a function of increased net income and depreciation, operational cash flow increased by $5 million. As discussed earlier, capital expenditures increased heavily in the last quarter. The biggest purchase was ambiguously called "purchases of investments," which may be a large purchase of intellectual property. Financing activities also raised $12 million in the last quarter. Cumulatively, the company decreased its cash influx compared to the last quarter.

Investors can also determine the stock's value by looking at financial metrics and monitoring growth patterns. When looking at value parameters like Price/Book Value and Price/Sales, Neogen appears to be an expensive stock. Return on equity is much higher than its peers: Neogen returns 13.4% while competitors return 0.6% on average.

However, when looking at growth parameters, Neogen's stock may have room to appreciate. Revenue growth, EPS growth, operating margin, and net margin are all much better than the industry average figures. Moreover, Neogen's debt-to-equity is 0, which is always a good sign for management and investors alike.

Investors need to consider why Neogen dropped heavily in today's trading session and determine if it is suitable for a medium to long-term play. Risk averse investors may not want to deal with the uncertainty, however, especially when the global economic climate is not promising.

Neogen is trading at $32.65, down 22.89% for the year.