Friday, February 17, 2012

Gee! No Earnings at Gevo

Gevo, Inc. (GEVO:  Nasdaq) is expected to report its fourth quarter and year-end 2011 financial results on February 28th after the market close.  A conference call is scheduled for the same afternoon.  There are a half dozen or so analysts following Gevo and the consensus among them is a loss of $0.49 per share on $16.5 million in total sales in the fourth quarter. 

If the last four quarters is any indication, expect an even deeper loss than indicated by the consensus estimate.  Gevo has failed to meet the average of its analyst following in any of the last four quarters.  As an analyst myself I am quite sympathetic.  You hear a story about a developmental stage company.  By definition there are no precedents.  So the analysts are left with all sorts of metrics provided by management, who by definition are flying blind because they have no precedents to go on either.

Gevo is trying to bring a renewable isobutanol product to the market.  A laudable endeavor as this specialty chemical finds its way with its four carbon alcohol profile into myriad products like transportation fuel, plastics and paints.   Unfortunately, Gevo has a ways to go before it reaches profitability.

So what should an investor pay for a stock in a company that is still needs a lot of red ink to reports its financial results?  The stock is currently trading at 4.2 times trailing sales  -  making GEVO shares pricey to say the least.  The analyst group is in wide disagreement on sales in the next year  -  low estimate is $43.5 million and the high is $142.0 million.  The first is probably an estimate that has not been updated considering that the company will likely report near $60.0 million to $65.0 million in sales this year.  In my view, the likelihood of 130% growth in sales is also not likely.  

Even though GEVO shares are trading at $9.00 and change  -  well off the stock’s 52-week high of $26.36  -  it seems prudent to remain on the sidelines for the time being.  Gevo has a decent customer list, but I will be looking for that inflection point that indicates the company can produce and ship in volume before taking a position in GEVO.  Perhaps that can be delivered through the company’s relationship with specialty chemicals producer Lanxess, which has signed on to jointly develop isobutene from Gevo’s isobutanol.  New facilities in Minnesota and South Dakota (my home state) are expected to come on line this year and next. 

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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