Mad Cow Rules the Fate of Digital Angel
Eric Gillin
12/29/03 - 03:35 PM EST
The outbreak of bovine spongiform encephalopathy, or mad cow disease, has been bad for the beef industry but good for
Digital Angel (DOC Quote), which makes tracking devices that are implanted into animals.
Shares of the St. Paul, Minn.-based company have nearly doubled since the U.S. Department of Agriculture's Dec. 23 announcement that the first case of mad cow disease had been discovered in the U.S. While mad cow-related worries were the catalyst for investor interest, Digital Angel has been also stoking the fire by touting its radio frequency identification, or RFID, devices in a pair of press releases in response to media inquiries.
"The proprietary technology here is that they have the only [Food & Drug Administration] and USDA-approved implantable microchip in livestock, which is the size of a grain of rice and injected under the skin with a syringe," said David Talbot, managing director of Melhado, Flynn & Associates, a brokerage firm, and an investor in the company. "This enables you to track the animal and take their body temperature remotely, from a distance of 20 feet away."
Such technology could be extremely beneficial to the USDA, which said it was contemplating an electronic-tracking system for livestock to help avoid the difficulties it now faces in investigating the mad cow outbreak in the U.S.
Despite the fact the company trades on the American Stock Exchange and has 29.5 million shares outstanding, investor interest in the company has been extremely high since the outbreak. On Monday, shares hit $4.99, a penny shy of a 52-week high, before the stock reversed direction and fell 7 cents, or 1.8%, to $3.88, on 5 million shares, 50-times its usual daily volume.
Indeed, as Monday's intraday volatility illustrates, investors hoping to capitalize on the company's unique position should be cautious about buying shares, since the company is not covered by Wall Street analysts, has no price-to-earnings multiple and is still losing money.
But the company, which recently changed its upper management and has been in the animal-tracking business since 1945, does appear promising and has government connections.
On Oct. 7, the company announced that the UDSA bought 300,000 RFID tags to use in a variety of animal programs, including one to combat Scrapie, a chronic wasting disease found in sheep that is similar to mad cow disease. The company already works closely with the Department of Energy to track millions of endangered fish as they pass through hydroelectric dams of the Pacific Northwest.
The specific impact of the Oct. 7 contract announcement on Digital Angel's earnings will be a mystery until the company announces the results of its fourth quarter. The company was still posting losses when it announced third-quarter earnings on Nov. 14.
Digital Angel announced third-quarter revenue came in at $8.3 million, down $1 million from the year-ago quarter, because of a timing change in shipments to customers. Net losses were deeper than the year-ago quarter, coming in at $2.4 million, or 10 cents a share, up from $945,000, or 4 cents a share, in the same quarter a year ago. While the last quarter was weaker than expected, the company's overall business is improving, with net losses down 80% from last year on a slight revenue gain.
But the last time Digital Angel appeared poised on the verge of a mad cow-related breakthrough, investors who dove in were burned after fears proved short-lived and new business didn't pour in.
On May 20, an outbreak of mad cow disease was discovered in Canada, prompting U.S. officials to enact a ban on Canadian beef. In the days that followed, Digital Angel touted its RFID devices as a potential solution to tracking infected animals in a pair of press releases that were extremely similar to the ones released following the U.S. outbreak of the disease.
Investor interest in the company shares, at $2.50 when the Canadian case was revealed, grew rapidly and shares hit an intraday high of $3.10 -- a 24% gain -- on May 23. Until mad cow surfaced in the U.S. last week, that spike was the last time Digital Angel shares were above $3.
The Canadian outbreak was contained and investor interest in the shares dropped. Average daily trading volume fell from a May high of 300,000 to a low of 6,100 in September.
Interest in the company's technology is growing, but unless that interest turns into a contract, history could repeat itself.
"They have the ability to process data on millions of animals. They have the data crunching in place and now they have the microchips in place," said Talbot. "But will there be legislation this time around or will Congress duck? I think there's a strong chance Congress will act."
If Congress gets involved, or if meatpacking plants decide to turn to electronic-tracking procedures to ensure the safety of the meat supply, then Digital Angel could profit handsomely. According to Kevin Nieuwsma, president of the company's RFID division, the company charges between $2 and $7 per head of cattle, depending on the kind of microchips deployed.
"We've had ongoing discussions over the last several years. We've been involved in the discussions that the USDA has had involving national identification over the last year, and a lot more since this Canadian case was discovered in May," said Nieuwsma.
After the Canadian outbreak did little to boost business, investor faith in the company has been damaged, and while the company has moved to replace its CEO and other key executive over the last few months, Talbot said its time for the company to make good on its promise.
"The new management will run the company much more judiciously and has better access to capital," said Talbot. "The company has one more chance to deliver on its promises and it better do it right."
