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Neogen Grows in Recession: Under the Radar

"Under the Radar" uncovers little-known companies worthy of investors' consideration. Check in at 5 every Monday, Wednesday and Friday morning to find out about stocks that tend to beat their bigger brethren.

LANSING, Mich. (TheStreet) -- When a company achieves the rare feat of boosting revenue in a weak economy, it's a testament to the relevance of its products and the value of its shares. Here's a financially sound small-cap stock that deserves consideration.

Lansing, Mich.-based Neogen (NEOG) makes diagnostic tests that detect dangerous substances in human food and animal feed. Our culture of consumer protection, which has made companies more liable in contamination situations, has spurred Neogen's aggressive expansion. Founded in 1982, the company now offers 200 diagnostic tests worldwide.

Neogen's revenue has grown 18% annually, on average, in the past three years. Its net income has climbed 26%, on average, during that period. The company has boosted earnings for 20 straight quarters. This cyclical resilience benefits shareholders. Neogen's stock has advanced 13% over the past year as the Russell 2000 Index, a small-cap barometer, dropped 20%.

Fiscal fourth-quarter net income rose 8% to $3.4 million, or 22 cents a share, as revenue increased 14% to $31 million. Although its gross margin declined from 55% to 54%, its operating margin rose from 17% to 18% as expenses as a percentage of revenue declined.

Of Neogen's two business segments, animal safety posted the larger sales increase in the quarter. The company purchased a line of disinfectants and cleansers from DuPont (DD) in spring 2008, which accounted for most of the company's revenue growth. Sales of pre-existing products also jumped 6%.

Neogen has an outstanding financial position. Its balance sheet holds $14 million of cash reserves, amounting to a quick ratio of 4. And the company has financed itself entirely with equity, so it has no debt. We give Neogen a financial strength score of 7.9 out of 10, higher than the "buy"-list average of 7.1.

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