Next week is showtime for hot-cold Martek stock

December 07, 2005|By JAY HANCOCK

Martek Biosciences Corp. stock will take off next week after the Columbia food-tech outfit reports fourth-quarter profits. I just don't know which way.

The bears on this stock (one "sell" recommendation on Wall Street, one "strong sell") seem as contemptuous as one can be toward something that is not a politician. The bulls (two "buys" and a "strong buy") believe Martek and its patented nutritional oils have only begun to make money.

Between them they have pushed and pulled the stock to a near-standstill, in the $28 range.

Next week we'll start to see who's right. And who has to let go.

All year Martek management has kept asking investors for one more chance to demonstrate that infant-formula makers are clamoring for its algae-based omega fatty acids; that it can make enough to exploit the alleged clamoring, and that it can do so without overexpanding and wasting money.

The first time Martek sought a second chance was in March, when it said it couldn't meet soaring demand for the oils that help infant brain and eye development. But production was increasing, "and all of this will be behind us" in the summer, Chief Executive Officer Henry "Pete" Linsert Jr. told analysts.

The second time was in April, when Martek said formula makers such as Nestle had too much of the product because shortage worries prompted them to overstock. The third time was in June, when projected sales got hurt by supposed delays in overseas launches of Martek-fortified formula.

The fourth time was September, when Martek said its soaring inventories - often a bad thing, indicative of poor sales - were generated on purpose to prevent new shortages.

The stock has gone from $70 to $35, back to $50 and now to $28. Wall Street doesn't like giving fifth shots at second chances.

For investors, Martek's supply seesaws have blotted out any reasonable estimates of demand, which is crucial for valuing the stock. And, fairly or not, earnings surprises are taken as prima facie evidence that management doesn't know what it's doing.

Watch out for falling objects next week if the company doesn't show some sales momentum, demonstrate it's moving inventory and reassure shareholders about what Linsert has said is a "steady Eddie" business underneath all the noise.

Ivan Feinseth, research director at Matrix USA in New York, doesn't just have a "sell" recommendation on Martek. He thinks it's a "strong sell," calls its product "a commodity" and wonders how there could have been a shortage last spring if Martek's customers were reporting too much product in their warehouses.

Feinseth says neither he nor his firm has a position in Martek.

Offering another view is T. Rowe Price, the Baltimore mutual fund house and Martek's fourth-biggest shareholder, with 2 million shares worth $56 million.

"The business model has a great deal of operational leverage" at Martek, says Dr. Jay Markowitz, a former Johns Hopkins transplant surgeon who analyzes biotech companies for T. Rowe Price. "If people think there will be demand, then it really can make a powerful impact on the company's earnings."

Demand is not a foregone conclusion, he realizes.

Numerous companies sell fish-based omega oils that claim to offer benefits similar to Martek's. Fish oil has historically been cheaper, and it's making inroads as a food fortifier - in yogurt, for example.

But Martek is cutting production costs, Markowitz says. Studies suggest that its algae-based oils yield nutritional benefits beyond what comes from a fish. Martek oils may have a better shelf-life than rivals in nonrefrigerated food such as cereals. While Martek has penetrated more than 70 percent of the U.S. infant-formula market, it still has large growth opportunities overseas.

Martek's oils may offer cardiovascular benefits, too. And rising inventories over the summer suggest that Martek has solved the production problem, Markowitz says.

What do critics want from Martek? he wonders.

"First they couldn't make enough," to satisfy the naysayers. "Now they make more than they need." And people still aren't happy.

To be fair, Martek has much more going for it than the average biotech company. It has a product, customers, cash coming in and profits at the bottom of the ledger. It signed a ballyhooed deal with Kellogg this year to possibly put its oils in cereals, although the deal promises little revenue until 2007 at the earliest.

But before worrying about algae derivatives in Special K, Martek needs to get the baby-formula business under control and regain credibility with investors. "We'll have some more clarity on this in our next conference call in December," Linsert said three months ago.

December is here.

jay.hancock@baltsun.com

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