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Contributors: Douglas McIntyre Jon C. Ogg

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Saturday, September 09, 2006

Weekend Edition: Martek Bio: When Baby Food Turns Into Baby Poop

"A perfect example of what happens when a stock in turn-around mode
unexpectedly guides lower again"

Martek Biosciences (MATK) is trading down 16% at $24.04 after hours after earnings and guidance.

the company posted EPS of $0.16 and revenues of $70.4 million, compared to estimates of $0.15 and $69.6 million. The reason for the drop is that the company offered revenue guidance of $63 to $66 million, compared to estimates of almost $75 million. It also put EPS at $0.09 to $0.12 compared to estimates of just under $0.20. That will put 2006 estimates at $0.62 to $0.65 now, down from the street estimate of $0.70.

Here is the problem. The company has been trying to get up off the floor after getting cut in more than half overthe last 18 months. The shares had hit the low $20's in May of this year and recently gotten back to a hair over $30.00 before sliding into todays close of $28.62. No one was expecting the company to miss this much ahead, and the general feeling was thatthe bar had been set fairly low so they could meet it.

Unfortunately, First Albany had just maintained a Buy rating yesterday. There had been such little news out of the company AND about the company in recent days and weeks that this guidance caught everyone off guard.

The moral of the story here will end up being that if you do not communicate your turnaround properly and if you miss artificially low estimates that you get punished more than if you came clean. This is taking us all the way back down to under $25.00 in after-hours trading and gets it dangerously close to the old $23.00 support. Its 52-week low is $21.70. Today effectively wiped out its entire turnaround plan.

The company had lower margins at 35% and said its R&D costs were up $900,000 to $6.2 million. It also said selling and general expenses were $3.5 million higher at $11.3 million because of staff expansion and because of higher payouts. This is still a gain compared to a loss in Q3 2005, but it just isn't good enough.

After looking through the progress and after the comments it really doesn't seem quite as bad as the reaction in the stock would lead you to believe. Unfortunately we live in a show-me world, and the street isn't going to trust underperforming stocks that don't live up to their capabilities.

This is a name we have wanted to have as a potential Bait Shop member, but because of valuations and because of internal "issues" it has never made it onto the list of buyout candidates. We will review this for down the road and after the company makes other inroads, but it is no closer to becoming a Bait Shop membertoday than before.

Martek developes, manufactures, and sells products derived from microalgae and other microbes primarily in the United States. Its products include nutritional oils used in infant formula, nutritional supplements, food fortification ingredients, and fluorescent markers for diagnostics and rapid miniaturized screening.

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