Friday, October 01, 2010

Plain Green

Based in Omaha, Nebraska Green Plains Renewable Energy, Inc. (GPRE: OTC/BB) is staying true to its colors as a grain-based ethanol producer. The company just announced the acquisition of Global Ethanol, LLC with two ethanol producing facilities in Iowa and Michigan that together have capacity to turn out 157 million gallons of ethanol per year. In addition to $20 million in cash, Green Plains is assuming debt and issuing stock to the sellers for the deal, which is valued at $169.2 million. When the deal closes later this year, Green Plains’ capacity to produce ethanol will expand by nearly a third to an annual capacity of 657 million gallons per year.

Management says it is trying to achieve scale that will generate higher profits on operational efficiencies in it marketing, storage and distribution infrastructure. They expect the Global Ethanol deal to be accretive to earnings in 2011.

Green Plains has been the fourth largest ethanol producer in the U.S. with the six production facilities it has been operating. After struggling for a couple of years, the Company reported a net profit of $19.8 million or $0.79 per share on $1.3 billion in sales in the year 2009. The first half of 2010 looks promising for another profitable year. Cash generation is even more impressive. Green Plains squeezed $53.4 million in cash from operations in calendar year 2009 and another $32.5 million in the first half of 2010. With $454.5 million in debt on the balance sheet that kind of cash could come in handy.

Shares of Green Plains are trading at 6.0 times reported trailing earnings per share of $1.98. That is impressive but appears the eight analysts do not expect the Company to continue producing profits at that level. The consensus estimate for 2010 is $1.20 earnings per share with a respectable increase to $1.41 in 2011. Of course, the pending deal will trigger revisions in the 2011 estimates in the coming weeks. Thus the forward PE ratio of 8.5 is probably a better view on valuation. Relative to the specialty chemical sector where ethanol producers are typically categorized for comparison purposes, the stock is egregiously undervalued.

We also note that unlike many ethanol producers that thought big and failed big (VeraSun Energy, Renew Energy, Northwest Energy), Green Plains has managed to remain in operation through the toughest times. While other competitors such as Pacific Ethanol, Inc. (PEIX: OTC/BB) and Aventine Renewable Energy Holdings (AVRW: OTC/BB) were struggling to re-emerge from bankruptcy protection, Green Plains has been working on building profits. Both have reported continued net losses in recent quarters. Archer Daniels-Midland (ADM: NYSE), arguably the largest ethanol producer in the world, in our view, is valued more on a “mash-up” of its many agriculture products rather than on its ethanol production.

With very poor comparable sources to get a fix on Green Plains’ value, it makes sense to use the Company’s growth rate as a proxy for an earnings multiple. The Price/Earnings to Growth ratio for GPRE is 0.90 suggesting the stock is undervalued at the current price level.

An even more salient question than value is whether investors belong in the ethanol sector at all. We will look at ethanol again in the next post to see what progress has been made in improving the economics of ethanol production in terms of pressure on the food chain, production energy requirements, and distribution costs.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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