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Seeking Alpha

Thursday, September 07, 2006

A Suggestion to Martek - A Cure for What Ails Them

I'm not a consultant, but here's some free advice to Martek's management. The reason the stock is down so much today is basically because of two issues.

1 They failed to communicate that this predisclosed and anticipated customer maintenance issue had not gone away or was not mitigated by strong growth. They needed to elaborate, and perhaps comprehend that their customer(s) (an important one) had not forestalled the planned maintenance, but was in fact preparing for it. Investors were told the impact of this maintenance would be felt in Q3, and then a few weeks later, management raised guidance for Q3. The investment community assumed the issue had passed. What in fact occurred was that the customer was stockpiling supply of DHA in preparation for its maintenance shutdown. The maintenance shutdown and then lack of ordering by customers having ordered already in a compensatory manner, led to anticipated lighter ordering. So we will feel the impact a little in Q3, but mostly in Q4. After that, it should go away.

2 They need to mitigate the impact of this kind of activity, which is likely to reoccur in the future. Because of this blip in ordering, Martek will not need as much ARA as usual and will order less. But, due to a lack of purchasing power, Martek will have to pay a higher price for that ARA, which will not work its way out of margins until a few months later. I have to ask, why does not Martek, the only supplier of patent protected DHA, not have the same kind of pricing power with its customers. What Martek needs to do today, is call up its customers, have them look at its stock price, and tell them that they will need some kind of pricing protection for these kinds of shutdowns in the future. When a customer purchases in bulk and then purchases lightly in the quarter to follow, not reaching a certain threshold, that customer must pay a compensatory higher price to mitigate the impact to revenues for Martek. Margin must make up for revenue shortfall, just as Martek's ARA supplier expects.

Martek's management team should have spelled this out more clearly to the investment community last night both in its press release and during its conference call. I believe the stock would not be down nearly as much if it had. We would simply say, oh, this is what they told us would happen, but it happened a little late. They also needed to elaborate a little better on what Q1 would look like. Simply saying revenues would grow and margins would begin expanding is not enough. We needed to hear that a level of normalcy would return to the operations. This is an operational execution issue, and Martek should also look to its operations department and expect more from them.

That said, to make an analogy here, this is really like squeezing only half the juice out of an orange. Because of the margin impact of these events, Martek is not getting as much juice out of the orange as it might have. This does not have to be an ongoing problem, if Martek would consider my proposals above. Also, this does not mean Martek will not get enough juice out of the orange to fill us up. But, when you can improve operational efficiency, you owe it to your shareholders to do so.

I certainly recommend purchase of the shares at these levels. The move reflects the kind of drop that would occur from a serious problem, and one does not exist. The product is still in high demand and operational trends will continue to improve with economies of scale. I believe we should only be down temporarily and it should only be $1 or $2. Long term cash flow forecasts do not need to be significantly altered and the cash flow potential of this firm remains super. Its current operational status is still strong, as it earns a significant profit and generates positive cash flow. I believe it will only take the announcement of a product launch to take the stock back above the $30 level. So, I recommend patience. I would take a Tums, a walk and buy some more. I hope this helps. Sometimes in the face of fire, we need to consider the fuel. There's not enough fuel here to burn this fire more furiously. It will infact burn out quickly. I would buy. You can dollar cost average your entry price lower by adding shares today.

What I would like to see from Martek now is an effort and results in mitigating this problem in the future. Also, I would like to see a product launch date announcement from an important food partner. As an interested investor, I believe I am owed this much.



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