Gevo's Glow

Specialty chemicals developer Gevo, Inc. (GEVO:  Nasdaq) is celebrating a string of market wins for its renewable chemicals and fuels.  Since its beginning thirteen years ago this month, Gevo has been doggedly perfecting its synthetic biology and chemical technologies and turning it into products that are in demand by consumers and industry.  Last week shareholders were treated to an announcement by the U.S. Environmental Protection Agency (EPA) raising the amount of isobutanol for on-road use to 16% blend level from 12.5%.  As a producer of renewable isobutanol Gevo will be a direct beneficiary of the EPA action. Following directly on the heels of that news, Gevo revealed its first long-term agreement to supply renewable alcohol-to-jet fuel to Avfuel Corporation, a distributor of aviation fuel to more than 3,000 locations worldwide. 

The two announcements bode well for a dramatic ramp in sales of Gevo’s isobutanol and jet fuel.  Nonetheless, management expects sales of ethanol to remain an important driver of profitability.  The single earnings estimate published for Gevo suggests the company will not achieve overall profitability in fiscal year 2018.  However, sales could double in the next twelve months, giving the company sufficient scale to bring profits to the bottom line.

Luverne Renewable Fuel and Chemical Plant

Gevo reported $30.2 million in total sales in the twelve months ending March 2018.  Ethanol and corn distillation by-products provided the majority of revenue with only token amounts from the sale of hydrocarbons and grant receipts.  Unfortunately, cost of production still exceeds sales value at the current production levels.  During the conference call with investors to discuss first quarter 2018 earnings, management described plans for the company’s principal production site in Luverne, Minnesota.  The plant is well position logistically for receiving corn feedstock and shipping Gevo’s principal renewable fuel products  -  ethanol, isobutanol, isooctane and jet fuel  -  as well as the animal feed by-products of the distillation process.  The plant apparently affords sufficient flexibility to focus on the ethanol and jet fuel products that can be scaled to profitability, while promoting demand for high-margin isooctane that can be made from isobutanol. 

During the earnings call in May 2018, management suggested profitability is about two years out.  In the meantime, Gevo has been using about $2.5 million in cash per quarter to support operations.  At the end of March 2018, the company had $7.0 million in the bank, suggesting a late-year cash crunch unless cash inflows increase or expenses are cut.  In the wake of the supply agreement with Avfuel, its appears plausible that there will indeed be more money coming in the door even if the company did not provided details on the timing of the first shipments.

To keep things from getting too stressful in the boardroom as the year 2018 comes to a close, Gevo has taken steps to raise additional capital.  An ‘at-the-market’ agreement with a leading securities firm has been amended to sell up to an additional $8.0 million in common stock.  The original agreement has been in place since February 2018, through which Gevo sold 1.8 million shares and raised $15 million in capital. 

After years of struggle Gevo management is now basking in the glow of both customer interest and investor support.  The situation bodes well for improved valuation sentiment and higher stock prices.  The shares spiked higher under heavy volume on the news of the jet fuel distribution agreement, setting a new 52-week high at $24.74.  However, in the days that followed the euphoria died out quickly and the stock came spinning back to the high single digits. 

The gyration ended a year-long downward slide in the share price that had for a time put the company in the unpleasant position of no longer qualifying for listing on the Nasdaq quotation service.  A reverse stock split in early June 2018, set that situation back right.  Although reverse stock split actions often result in yet another period of slumping prices, the spate of good news should help preserve Gevo’s value.

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.