Omega Protein (OME): A Different Kind of Oil, Making the Most of Menhaden

Most writers will admit that occasionally the well runs dry, and they run out of ideas. We’ve never had that problem here at Cheap Stocks. Granted, we only publish 4 to 8 times per month, but if this site was our full time job and we could feed our family and pay the mortgage from site generated revenue, we have little doubt about our ability to publish quality research 5 days a week (some of our readers might argue that point).

That being said, we’ll admit that sometimes our ideas for research come from strange situations. This is one of those times.

It so happened that we were on the beach Labor Day morning, a beautiful day, on the New Jersey Island we call our summer home. The plan was for the kids to surf before the lifeguards came on duty. But before anyone could get into the water, we noticed something strange. Dozens of pelicans attacking the water, schools of fish getting closer and closer to the shore. Then some of these fish started washing ashore. Most were still alive, some had a bite or two taken out of them. We threw them back in as quickly as they washed ashore, but we are not sure which fate was worse: suffocating on shore, or being tossed back into the midst of hundreds of mean, angry, and very hungry bluefish—the very reason these fish were so close to shore.

The fish washing ashore were Menhaden, otherwise known as Bunker. These oily fish have no use as food for human consumption (although they are excellent bait for blue claw crabs). As it turns out, they are also an excellent source of Omega-3 fish oil, commonly used to combat high cholesterol.

Omega Protein
That’s where Omega Protein (OME) enters the picture. Fish oil is their business. This small ($151 million market Cap) Houston based company uses a fleet of 32 spotter airplanes to find these fish, and 61 boats to bring home the catch. From there, the company processes the fish into Omega-3 fish oil used as a dietary supplement for humans, and sells what’s left over as animal feed, fertilizer and other products.

We’ve been intrigued by this company for years, but have never owned it-directly that is. We did own shares of Zapata Corp (ZAP), which until last year owned 58 percent of Omega. At the time we bought Zapata, this was the cheapest way to get exposure to Omega. Ultimately, Zapata decided to unload Omega, much to our chagrin, at well below market prices. The buyer of this huge Omega stake? Omega itself, which bought, and retired the shares. There’s where the story gets interesting. On November 28, 2006, the Company purchased 9,268,292 shares from Zapata for $47.5 million, or $5.125 per share. The previous day, Omega closed at $7.61, so this represented a 33% discount, not uncommon in the sale of such a large stake. The purchase was financed by a senior secured financing facility, increasing the company's debt load.

Omega also had the option to buy the rest of Zapata's stake, 5.2 million additional shares at $4.50 per share, but passed on that offer. Instead, those shares were purchased by multiple institutional investors for $5.55 per share, or $29 million. The purchasers included Special Situations Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Franklin Microcap Value Fund, Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Channel Partnership II, L.P.

The Fundamentals
Fiscal year 2006 sales rose 27% to $139.8 million from 2005s $109.9 million, and net income was $4.57 million, up from 2005s $7.2 million loss. Keep in mind though, that Hurricane Katrina was a factor in 2005s results, and several of the company's processing plants were severely damaged. For the latest reported period (Q2, June) the company netted $2.6 million on sales of $37 million.

As for the balance sheet, the company ended Q2 with $3.8 million in cash and $56 million in inventory. Certainly not a stellar balance sheet, and LT debt at $62 million increased as a result of the share purchase from Zapata. This is a fairly capital intensive company, with nearly $100 million in plant and fishing vessels, net of depreciation. Latest tangible book value per share was just north of $6.


The Risks
This company is not without its share of risks. First, Omega is completely dependent on finding an adequate supply of fish, and there are no guarantees here from year to year. Fish are the raw material, and without them, no product, no revenue. Second, fish oil yields have recently been down, and there is nothing the company can do about it. Lastly, the company has become extremely unpopular in the Chesapeake Bay area, one area where it harvests large quantities of Menhaden. Some believe the company has over-fished the Bay, posing a threat to the ecosystem, and the other fish that utilize Menhaden as a food supply. To that end, the State of Virginia imposed limits on Omega’s annual Menhaden Harvest. Further limits here, or other areas where the company harvests, could mean tough times ahead for Omega.

We view Omega as a company to keep an eye on. The valuations are not all that compelling at current levels, but this is a company in a niche market, and assuming they can continue to harvest an adequate supply of Menhaden, and that more consumers turn to natural methods of lowering cholesterol, and other benefits fish oil supplements are purported to provide, Omega may deserve a look.


*The author does not have a position in Omega Protein. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Top 10 Net/Nets by Market Cap

Admittedly, it's still a bit boring these days in the land of companies trading below their net current asset value. Dr. Bernanke did not help yesterday when he and his band of merry men lowered the Fed Fund Rate (and discount rate) 50bps. (Cheap Stocks, for one, was surprised it was 50bps)

Still, the markets move forward, basking in the glow of the rate cut, and the list of net/nets grows stale. Chock full of "acquisition" companies that have no real businesses, or companies that have sold off good businesses, and have no real plans for the proceeds(we mean you, Zapata)and the primary assets are cash, there's not a lot to get excited about. Just two of the companies are currently profitable--that is, they have trailing 12 month positive net income-- Audiovoxx, (a perennial net/net it seems) and Tandy Brands Accessories.

Top 10 Net/Nets by Market Cap
Audiovoxx(VOXX)
Mkt Cap: 246
NCAV: 279.6
Price: $10.8

Energy Infrastructure Acquisition Corp(EII)
Mkt Cap: 204
NCAV: 206
Price: $10.8

Atlantic Coast Entertainment(ACEH)
Mkt Cap: 170
NCAV: 218
Price: $17.1

Zapata Corp(ZAP)
Mkt Cap: 137
NCAV: 150
Price: $7.1

Media and Entertainment Holdings Inc(TVH)
Mkt Cap: 94
NCAV: 97
Price: $7.4

Columbus Acquisition Corp(BUS)
Mkt Cap: 88
NCAV: 110
Price: $7.4

Transforma Acquisition Corp(TAQ)
Mkt Cap: 80
NCAV: 96
Price: $7.5

MediciNova(MNOV)
Mkt Cap: 79
NCAV: 96
Price: $6.8

Tandy Brand Accessories Inc(TBAC)
Mkt Cap: 73.6
NCAV: 74.4
Price: $4.1

InFocus Corp(INFS)
Mkt Cap: 70
NCAV: 77
Price: $1.7

There you have it. Stay tuned; we'll keep turning over rocks, looking for value.

*The author does not have a position in any companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Playing 20 Questions With St Joes (JOE)

Lost amid the seemingly dim economic news that was released last week and today, all of which is fueling Wall Street's hopes for a 50 basis point cut in the Fed Funds Rate at next Tuesday's Fed meeting (don't bet on 50bps), was an interesting little press release courtesy of St. Joes.

Actually, it was 10 questions, but was no doubt an attempt by the the company to counter recent bearish sentiment about JOE. The press release, admittedly one sided, is still an interesting read. If you want to hear both sides of the JOE argument, read it in conjunction with Greenlight Capital's David Einhorn's recent response to a previous Cheap Stocks post about St. Joes.

For our part, we took advantage of the recent dip below $31 to increase our St. Joes position. We simply couldn't say no at those levels.

*The author has a position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Cheap Stocks Random Notes: The Frivolous Lawsuit of the Week: Jones Soda (JSDA)

The sharks are circling Jones Soda (JSDA) since the stock tumbled from the $30's to $10; yes, here come the lawyers and their class action lawsuits. We owned the stock, (yes, way out of character; search the site for previous posts) we sold it when we thought the valuations were beyond ridiculous and priced for utter perfection, we even received some very nice e-mails from "investors" who not so politely told us how stupid we were.

This particular suit, Hagens Berman Sobol Shapiro , takes the cake. Here is an exerpt from the press release:

The complaint generally charges that Jones Soda and the executives made misleading statements about an expansion into major retailers, such as Wal-Mart, Kroger, Safeway and Kmart, with a new 12-ounce canned soda and a major marketing campaign. The "continued bullish statements" caused the stock price to surpass $32 a share April 16, which more than doubled the company's market value, the suit says. But Aug. 2, the company reported significantly lower-than-expected canned soda sales and said it had difficulty getting the new products on retailers' shelves before the Memorial Day holiday, the suit said. The problems also caused the company to embargo an advertising campaign, and it "essentially bumbled the launch of Jones Soda 12-ounce cans," the suit says. The stock price, following two quarters of poor earnings results, has fallen 67 percent since hitting the record high in mid-April.

Give us a break. Not even flawless execution of the company's strategy was justification for the price of the stock. Whether or not Jones executives made misleading statements, we can't say. But we do know investors make mistakes, we sometimes get greedy, and our vision is clouded by the behavioral biases we struggle with. But we can't keep running to the lawyers everytime we get burned. Especially when we should have known better.

We aren't saying that corporate management is above reproach, and never at fault. We've seen countless examples in the past several years of fraud, and blatant disregard for shareholders. We're not convinced that this is the case with Jones Soda. We are sure, however, that investors need to take personal responsibily for their decisions. And we all make some very bad ones now and again.

*The author does not have a position in Jones Soda. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.