Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
week Brazilian agriculture technology developer Ceres (CERE:Nasdaq)
made formal plans to shift its focus to seed traits and the food and feed
markets and away from energy.Ceres is
not abandoning biofuels as such, but with oil prices at historic low levels, it
is not economic enough to justify working capital not to mention new investments.The
company is restructuring operations and reducing personnel in both its U.S. and
Brazilian operations.Ceres management estimates
the changes will save between $6 million and $8 million next year.
The question investors need to ask now
is whether the shift in priorities can change the value of Ceres.
company has a strong balance sheet with no debt and $4.8 million in cash and
$9.9 million in marketable securities.The cash and financial assets will come in handy over the months as
Ceres tries to reinvent its business model. Ceres has yet to post a profit on its various
the company has required considerable investment in working capital.Over the last year alone Ceres has used $23.9
million in cash to support operations.Assuming the anticipated savings develops as planned, it is possible
that Ceres might need another $16 million to $18 million to keep the wheels
turning.Still it looks like the company
could be $2 million to $4 million short.
the first hiccup in creating value is the potential need to raise capital.That means either increased leverage or
issuing additional equity securities.For a company that is not generating profits or cash, debt can be
troublesome.For most investors, the dilution
from new stock is anathema to creating value.
be fair, Ceres has been making progress with its crop traits.In March 2014, the company announced plans to
accelerate development of its sugarcane traits after initial field trials found
better than expected growth and biomass even under drought conditions.The next stage of field research is expected
to be completed by June 2016.If the
company is able to keep pace with the planned schedule, the sugarcane traits
should be ready for commercial market introduction in 2018.
company has made some progress that could bring in revenue in the
near-term.Ceres has licensed its
homegrown bioinformatics software platform to HZPC Holland BV, a seed potato developer.The license will allow HZPC to access DNA databases.One software license is not material.However, in my view, the fact that Ceres
commercialized a technology that it has originally developed only for in-house purposes,
is a plus for Ceres.It is just the kind
of creative management that is needed during adverse market conditions like
those presented by weak price conditions in the energy market.
does not look like there are any significant revenue and earnings generators in
the wings.The single revenue estimate
that is published by Thomson Reuters for Ceres suggests revenue could ramp
dramatically in the fiscal year ending August 2016.That that analyst thinks there will be
profits, he or she is keeping it a secret as they have not published an
course, this estimate could be predicated on the old biofuel-centric business
model.Yet, I see little change in the
potential for revenue and earnings in a ‘food and feed’ business model.
if investors must wait for earnings to create value, the stock represents an
option human or capital assets.While I
might like management’s style, Ceres stock price seems a bit steep for an
option on management.Its crop products,
sorghum, sugarcane and switchgrass seem better suited to the energy market than
to feed hungry mouths.Thus the stock
seems a bit overpriced as an option on the intellectual property if its
application is to be limited to ‘food and feed.’
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.