A forest fire is extremely destructive in the short run. But in the long run, the few trees left standing are sitting pretty. Not only do they have a monopoly on the sun, they also have all the room they need to grow to new heights.
That’s exactly what’s happening in the ethanol industry right now.
From 2004 to 2008, a wave of capital rushed into the ethanol industry looking to cash in on the emergence of biofuels as an alternative energy source. But after input costs spiked and the fracking boom pushed natural gas prices to an all-time low, many of the industry’s biggest players hit the eject button. That includes Shell, closing all 10 of the biofuel projects it was working on in 2008.
But after a violent four-year contraction, one of the few companies left standing is in position to cash in on an industry resurgence. That has lifted its share price to a market-crushing 110% gain this year.
I’m talking about Green Plains Renewable Energy (Nasdaq: GPRE), a domestic leader in ethanol production with a market cap of just $506 million. As you can see from the chart, Great Plains is already cashing in on the resurgence of the biofuels industry. But looking forward, Great Plains continues to aggressively pursuit new opportunities to expand its business. And that’s creating another big opportunity for investors.
In early June, Green Plains said it would acquire the rights to NEDAK Ethanol, an ethanol plant in Atkinson, Neb. The $15 million deal also includes a loading facility 15 miles away with a storage capacity of 24,000 gallons that is strategically located near key rail-shipping lines. The acquisition is expected to add 50 million gallons of additional ethanol production to its current production capacity of 750 million gallons.
Later that month Green Plains also announced a few initiatives to increase its vital grain storage capacities that it will use to feed its growing production capacities. That includes a grain elevator in Archer, Neb., with storage capacity of 200,000 bushels and beginning construction on another storage facility to add 1 million bushels of grain storage capacity that is scheduled to come online before this year's fall harvest.
Green Plains is also involved in developing some of the ethanol industry’s most progressive technologies with the potential to create big cost savings in the long run. One of the great challenges of the biofuels industry is the high cost of using corn as ethanol feedstock. That’s why Green Plains launched a joint venture in 2008 with Bioprocess Algae LLC to commercialize algae production as a less expensive alternative to corn.
The initiative has quickly gained traction, with the Bioprocess Algae venture expected to produce 350 to 400 tons of dried algae annually when its current expansion project comes online in the second half of 2013. That helped the company land a $6.4 million grant from the U.S. Department of Energy in April to develop drop-in fuels for military jets and ships.
But it’s not just pure sales growth fueling Green Plains. The company is also benefiting from a better "crush spread," the profitability of converting a bushel of corn into a barrel of ethanol.
In the summer of 2012, the crush spread was compressed by the high cost of corn after prices spiked on the worst drought in the Midwest in 100 years. But with corn prices collapsing to multi-year lows, ethanol crush margins have expanded to $0.10 after crashing to zero in the second quarter of 2012. That has been a huge driving force lifting the ethanol companies who remain in business to record profitability and earnings.
Green Plains will also benefit from its strong financial profile. In the last year, cash and equivalents jumped 44% to $280 million while long-term debt fell by $130 million to $363 million. That will provide Green Plains with the flexibility to navigate short-term volatility, invest in growth and increase its operating leverage as the ethanol movement gains momentum under new technologies.
All the good news has analysts calling for 300% earnings growth in 2013, 60% earnings growth in 2014 and 9% annual earnings growth in the next five years.
Risks to Consider: Analysts are expecting some short-term pressure on third-quarter crush margins due to fluctuations in cash prices before a large rebound into the end of the year. That could lead to some near-term headwinds in shares after gaining more than 100% in the first nine months of this year.
Action to Take --> In spite of all the good news and a big gain in 2013, Green Plains still looks like a great deal, trading at just over 10 times projected earnings of $1.50 per share in 2014. If Green Plains simply holds its current forward price-to-earnings (P/E) ratio of 17 times, shares would jump to $29 in the next 15 months, a 70% increase from current levels.