Strategic Shift Triggers Name Change

Last week Pacific Ethanol announced a new corporate name:  Alto Ingredients.  Leadership thinks the new moniker better fits the company’s broadening product line that has gone well past ethanol for fuel.  The company’s high-grade alcohols can be used in food and beverages as well as pharmaceuticals and beauty products.  Of course, Alto is still producing ethanol for fuel and protein by-products for animal feed and pet food.  However, the company has taken to describing its business as ‘specialty alcohols and essential ingredients’ rather than an ethanol.

The name change took effect immediately.  On February 1^st, traders must look for the new stock symbol:  ALTO.  Should investors take a position in a seasoned company with a new name?   

The renewable chemicals market shows considerable promise for companies like Alto that are looking for better margins by repositioning a core product.  The renewables chemicals market includes alcohols like ethanol that Alto produces as well as methanol.  Additionally, biopolymers such as starch blends and regenerated cellulose are included.  Facts and Factors, an industry research firm, valued the renewable chemicals market at $65 billion in 2019.  F&F analysts predicted 10% compound annual growth in the segment through 2027.  By contrast Grandview Research, another industry research firm, recently predicted seven-year 4.8% compound annual growth for the global ethanol market.  Thus investors can check the first box for management’s astute selection of a target market  -  at least in terms of growth potential.

The real question is whether Alto can make a profit in the specialty chemicals market.  In the first nine months of 2020, Alto managed to eke out $728.2 million in total sales.  This compares dismally to $1.1 billion in the same period of the previous year.  The dramatic decline in revenue is part and parcel of renewable fuel demand destruction in in 2020 due to the economic slowdown during the coronavirus pandemic.    

Alto is operating at about 50% total capacity with corn distillation underway at only three of its seven production facilities.  The other four have been idled in anticipation of improved ethanol market conditions.  Interestingly, one of the idled plants is among those acquired in 2017 with Illinois Corn Processing.  Management has said that the dry mill plant in Pekin, Illinois will be restarted when certain repairs are completed to shipping infrastructure.  The Illinois operation is worth nothing as it was this strategic deal that turned Alto down the road to food and consumer markets with specialty alcohols.

Despite the squelch at the top-line, Alto reported an operating profit of $25.7 million in the first nine months of 2020.  Excluding a gain of $11.8 million related to a litigation settlement, operating income would have been $14.0 million.  The company had experienced an operating loss in the same period in the previous year 2019, due largely to unfavorable spreads between costs and selling prices. 

The improvement to operating profit in 2020 for Alto was accomplished mainly with the shift in the production and sales of specialty alcohols.  Despite continued decline in demand and selling prices for fuel-grade ethanol, Alto experienced a 13% jump in average selling prices for its alcohols in 2020 compared to 2019.  This due to a higher percentage of high valued-added specialty alcohols in the sales mix.

Cash flow generation confirms the wisdom of leadership strategic moves.  In the first nine months of 2020, Alto generated $75.7 million in operating cash flow compared to cash usage of $27.2 million in the same period of the previous year.  True enough much of the cash flow in 2020 came from working capital accounts such as inventory draws and accounts receivable collections.  However, Alto also reduced accounts payable, to better align working capital resources.

The case for Alto is aided by a sturdy balance sheet.  At the end of September 2020, Alto had $162.9 million in debt on its balance sheet, reflecting a debt-to-equity ratio of 66.43.  Cash balance was at $38.7 million.  The balance sheet had been fortified by a follow-on offering of common stock in October 2020, that raised $70.7 million in new capital net of fees.  Certainly, participants in the October 2020 common stock offering will be cheering on an upward revaluation of the shares given the current price is well under the $8.42 per share offering price.      

Traders new to the story might be licking their lips at the favorable change in Alto’s business model.  It gets better.  A trio of analysts have published sales and earnings estimates for Alto that suggest improvement at the top line in 2021 back to $1.1 billion and a jump in earnings to $1.33 per share.  The stock is currently priced at 5.1 times future earnings, putting PEIX and soon to be ALTO among ‘basement bargain’ stocks.           

 

 

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.