Putting Your Money Where Your Mouth Is, Part 2

Editor's note: James Brookes-Avey continues his look at investing opportunities in the food safety industry with today's article. Don't miss his first article on this topic.

One of the few companies brave enough to risk an IPO recently has been SureBeam(SURE). The San Diego-based former unit of Titan(TTN) provides proprietary food irradiation systems and services for the food industry through electronic, or so-called "cold," pasteurization. Unlike competitors Steris(STE), Belgium's Ion Beam Applications or Canada's MDS/Nordion Food Technologies(MDZ), SureBeam's systems use ordinary electricity rather than nuclear radioactive materials, like Cobalt 60, to power their electron-beam linear accelerators.

Using Cold War technology first developed for missile defense, SureBeam linear accelerators use electricity to produce a beam of electrons accelerated by resonant magnetic cavities almost to the speed of light. Directed by magnetic deflection, the beam scans across packaged food items brought through a shielded area on a conveyor belt, disrupting the DNA of any unwanted live organisms present (i.e., pathogens or infestations) to either the point of death or sterility with direct electron or X-ray treatment.

Regulated as a food additive by the FDA, direct electrons penetrate food items up to four inches thick, X-rays even more so -- whereas external chemical washes, like Alcide's(ALCD), are effective on the surface only. This gives SureBeam the capability of killing almost all food-borne bacteria, fruit flies and other pests, throughout the food, while preserving its taste, texture and nutritional value and, for some foods, tripling shelf life. (Note: The virus causing mad cow disease cannotbe stopped by irradiation.)

SureBeam's technology has won endorsements from a Who's Who of food producers including Tyson Foods(TSN), IBP(IBP), Cargill, Del Monte Foods(DLM), Kraft Food Holdings, Omaha Steaks and United Food Group.

For recurring revenues, the company plans to retain ownership of any in-line food irradiation system it places within a customer's existing production line, charging a per-pound processing fee, and operate its own stand-alone SureBeam service centers for third party drop-off and pick-up. A service center in Sioux City, Iowa -- the nation's first commercial electronic food irradiation facility -- is already up and running, and others are planned for Los Angeles, Chicago and Philadelphia using IPO proceeds.

SureBeam does have some significant hurdles to overcome, though. The company remains unprofitable, and 80% of sales for 2000 came from just three customers. In addition, health-conscious consumers and environmentalists may have trouble accepting widespread food irradiation, despite the fact that gamma rays have long been used to zap ground beef, and fruits and vegetables are often fumigated with toxic methyl bromide.

Targeting Poultry Production

Based in Research Triangle Park, N.C., Embrex(EMBX) makes biological, pharmaceutical and mechanical technology aimed at improving productivity of the world's $100 billion poultry industry. With an estimated 371 million egg-laying chickens clucking away in America today producing more than 71.4 billion eggs annually, eight billion of which become broilers, Embrex's potential market is huge.

The company's Inovoject egg injection system safeguards animal health with the earliest, most effective bird disease protection available, delivering vaccines in ovo (i.e., in the egg) for Marek's disease and infectious bursal disease. The machines can inoculate up to 50,000 eggs per hour and are used by the likes of Tyson Foods, Perdue Farms and ConAgra(CAG). Embrex also plans to make its own in-house vaccines to combat such avian afflictions as Newcastle disease, coccidiosis and infectious bronchitis.

Following the "razor-blade" business model of trying to establish a global standard, then supplying the consumables required, Embrex has injected more than 35 billion eggs since 1992, and its sales and earnings have grown since 1996. The company also ranked 62nd on Forbes Magazine's latest "200 Best Small Companies in America" list.

Yet the stock has been under a cloud lately, with EPS growth decelerating for several quarters. Worse, fourth-quarter and fiscal year 2000 EPS were restated below previously reported results after an internal audit discovered embezzlement within its European operations. But the company has a market share lock on North America, and is now targeting vertically-integrated producers overseas. (Significantly, a mere 50 firms produce 75% of the world's chicken supply.) Watch for a turnaround.

A Toolmaker Play

A dark-horse candidate for the food safety industry may be industrial machine toolmaker Flow International(FLOW) and its new Fresher Under Pressure food preservation system. Although still just one-tenth of the sales of high-pressure waterjet cutting systems, growing acceptance by customers like Perdue Farms and Hormel Foods(HRL) may swell food safety waterjets into Flow's largest business within five years, protecting everything from orange juice to oysters.

Waterjets are highly effective against pathogens in seafood such as listeria monocytogenes. In a method still not scientifically explained, the intense 100,000 psi pressure brought to bear by Flow's "killer squirt guns" is thought to rupture bacteria's cellular membranes, hydrostatically blasting them to death while leaving the food's surface relatively unscathed.

Bottom line? For a hungry and more integrated world, global production of beef, poultry, processed meats, seafood, fruits and vegetables is a colossal 1.8 trillion pounds a year. Safeguarding even a fraction of that should be a tremendous opportunity for innovative companies.

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