Hi Everyone,

One of my clubs owns Neogen (NEOG) It's a great little Michigan
company with a fascinating business. Wall Street thinks so also.
They just came out with a great quarterly earnings announcement. I
just looked and it's currently trading at a 44 P/E ratio. Not that it
hasn't done well in the past and not that it's not projected to do
well in the future. But a 44 P/E is pretty high. Manifest Investing
projects the annual return for Neogen to be 3.7% at todays price.
If we're trying to target the projected return of your portfolio to be
higher than the Vanguard Index 500 projection (currently shown in
Manifest as 10.6), we should probably consider whether it's time to
take our money out of this stock and put it into something that might
have a higher growth projection.

If we need more of a reason to feel like it's a little riskier than
we might like, we might venture into it's financial statements. In
the Assets section of Neogen's Balance Sheet, there is an Asset
Recorded that is called "Goodwill". One of the ways Neogen grows is
by purchasing other companies. Goodwill is the difference between
what they have paid for a company and it's Book Value. It is an
attempt to quantify the value of things like a Brand name or secret
formula which makes a business profitable but which doesn't show up in
accounting statements because it is not easy to measure until a
business is sold.

The most recent annual report shows that the Goodwill Asset of Neogen
has grown 33% since last year. In fact Goodwill is 29% of their total
assets.

So how does this relate to the price of their stock?

Price projections are based on earnings projections. Each year, the
value of this Goodwill asset needs to be determined. If it is
determined that it is no longer as valuable as it was when the
original purchases were made, it is considered impaired and must be
written down to it's current fair value. As you might imagine, the
determination of the current value of Goodwill is done as
scientifically as possible. However, it's probably the case that
there is also some art involved with coming up with a good number.

When Goodwill is written down, it is recorded as an operating expense
on the Income Statement. As such, it will affect the Net Income and
thus the earnings per share (EPS). For example, if Neogen had to
write down their goodwill by 10% next year, there would be a $5289000
expense that would lower their net income. If that had been taken in
the fiscal year that just ended in May, it would have reduced their
earnings per share from $.78 to approximately $.62

I can't say whether there is any reason to impair the Goodwill showing
on Neogens balance sheet. I can only say that is a pretty large
percentage of their assets and an impairment might cause some damage
to their earnings at some point going forward. This is a type of risk
that you might consider when you've had a stock that has done as well
as Neogen. Is there more potential at this price for it's share price
to increase or decrease? The Manifest projections, which are based
on Analysts projections, indicate that it might have run up as much
as can be expected for a while. This might be the time to consider
whether it's time to take some profits and look for a candidate with
higher projected returns for your portfolio.

Suggestion for a club activity-Venturing into financial statements.
Why don't you take a stock you've done well with and take a look at
it's financial statements. Look at the Assets section on it's balance
sheet and see whether there is any Goodwill recorded there. What if
that amount had be written down by some percentage? Calculate the
amount that would have to be subtracted as an additional expense on
the Income Statement and see how that would have affected Net Income
and Earnings Per Share. What kind of projected return are you
expecting from this stock? If it's done well recently and the amount
of Goodwill you see on their balance sheet means they have a fair
amount of exposure to the risk of an impairment expense lowering their
future earnings significantly, you might have another reason to think
about the risk and reward of continuing to own it at it's current
price.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

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INFO: ON Neogen OLD but GOOD