Estimates for this ethanol producer are quickly rising, up more than $1.50 in the last 90 days.
Green Plains Inc. (GPRE)
from The Energy Strategist
The fourth-largest North American ethanol producer, Green Plains (GPRE) operates 12 plants in Indiana, Iowa, Michigan, Minnesota, Nebraska and Tennessee with an aggregate production capacity of more than a billion gallons of ethanol, 2.9 million tons of the distillers grains byproduct and 250 million pounds of corn oil. Green Plains also owns four grain elevators that, together with storage facilities at its plants, allow it to store nearly 31 million bushels of grain. Such storage capacity will be at a premium this year.
In addition, the company maintains a network of logistical facilities that allow it to market and distribute its ethanol as well as that of a third-party producer. It also has a commodities trading team pursuing trading gains and not merely trying to maintain its parent’s hedges and owns 60% of an algae biomass development venture.
Green Plains reported a six-fold increase in operating income in the first quarter of 2014, earning more than it had during the entirety of the prior year, thanks to the acquisition of three plants that boosted ethanol output 35%, even as the cost of corn dropped 39%.
Importantly, that did not include $22 million in deferred profits for ethanol sold but not yet delivered to customers because of widespread rail snags. Adding that deferred stream back in, Green Plains appears capable of generating annual operating income of up to $400 million based on current fundamentals.
Despite rallying 40% over the last two months, GPRE shares still trade at 11.5 times this year’s consensus earnings estimate, which has likely not yet fully reckoned with the corn crash.
Of course, sentiment is likely to remain volatile.
If corn continues to struggle and ethanol exports keep rising, the trend will extend. More widespread adoption of the E85 gasoline blending standard would also help pour fuel on the fire by expanding the domestic ethanol market.
And if the Environmental Protection Agency decides in the next two months not to rein in legally mandated ethanol use quotas as much as it has indicated it might to cope with a shortage of product and limited gasoline demand, the industry would have another catalyst.
Lower corn prices boost ethanol production and make it harder for refiners to argue that there is not enough biofuel to go around for blending. Cheap corn also makes renewable fuel quotas easier to defend politically both as a needed support for farmers and as a green technology (in truth, the jury’s out on that claim) that does not add too much to food prices.
But this is primarily a momentum play on the bear market in corn and the likelihood that the biofuel mandate is here to stay. Buy GPRE below $44.
Robert Rapier & Igor Greenwald, The Energy Strategist, www.energystrategist.com, 800-832-2330, July 23, 2014