Martek's Forecast Leaves the Stock Malnourished

The maker of nutrition products lowered its outlook for its fourth quarter, leaving analysts to question its growth

Martek Biosciences (MATK), an outfit that produces nutritional ingredients derived from microalgae, fungi, and other microbes, left a bad taste in investors' mouths on Sept. 7. Shares of the Columbia (Md.)-based company plunged 6.50 to 22.12 in afternoon trading after it announced third quarter EPS of 16 cents, vs. breakeven results one year ealier, on a 78% revenue rise. What riled investors was the company's forecast of lower-than-expected EPS forecasts of 9 cents to 12 cents for the fourth quarter and 62 cents to 65 cents for all of fiscal 2006 (ending October).

Martek's claim to fame is its nutritional supplements, fatty acid components, primarily docosahexaenoic acid (DHA) and arachidonic acid (ARA), which many researchers believe may help develop the eyes and central nervous systems of newborns and promote adult mental and cardiovascular health. The compounds have been added to infant formula, foods, and dietary supplements.

Martek's forecast prompted one Wall Street firm to downgraded its opinion on the stock on Sept. 7. Analyst Elise Wang cut the shares to hold from buy, saying that reduced gross margins and continuing idle manufacturing capacity costs will exert significant pressure on the bottom line well into the next fiscal year.

Wang also notes Martek's lower fourth-quarter guidance is due to fluctuations in customer orders and EPS due to higher costs for the company's ARA supply and increased idle manufacturing capacity costs despite a "solid" third quarter. In addition, Wang says the company indicated visibility on revenue growth from key food opportunities will not become apparent until late next year.

Wang cut her EPS forecasts from 75 cents for fiscal 2006 to 69 cents, and $1.60 for fiscal year 2007 to 90 cents. She lowered her price target on the stock to $27.

Another analyst soured on the stock. Canaccord Adams analyst Scott Van Winkle downgraded Martek to hold from buy, and reduced his price target to $28 from $41. He said in a note that there has been no material growth in the infant formula market over the last few quarters.

Merrill Lynch analyst David Munno kept a sell recommendation on the stock. According to news reports, he said earnings for the next three quarters will probably be weak given that costs for manufacturing remain high, and due to fluctuations in customers' production timing.

Based on the Street's reaction, Martek's latest forecast may leave the shares undernourished for some time to come.

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