GEVO, ranked eighth by Biofuels Digest among the most popular bio-chemical companies, is a leading company in producing chemical and biofuels. Its major product is Isobutanol, a colorless, flammable and special-odor organic compound. Isobutanol can be perfect alternative for many petroleum-derived products. Unlike petroleum-derived products, Isobutanol is renewable, environment friendly and cost efficient. And, as (a)solvents and coatings, (b)material, plastics and fibers, (c)biojet blendstocks and (d)specialty fuels.
We believe that Gevo is currently trading at a significantly undervalued price level. Leading the way especially in Isobutanol industry, Gevo is gradually getting back onto the right track by its effective management, preeminent patents and outstanding products. Given the widely applicable Isobutanol Industry, Gevo is set to grow in double digits.
Here are six reasons why we think Gevo is significantly undervalued:
Isobutanol Industry has seen a surge in global demand. According to "MarketsAndMarkets" 2013 April Isobutanol Report, the market demand for Isobutanol will reach 9.4 Billion Dollars in 2018, which is 50% increase from current level 6.0 Billion Dollars. In addition, Dr. Patrick, CEO of Gevo, said that in the near future, Isobutanol and its derived products can be applied into 40% of Petroleum-based products, or it might totally substitute the current fuels. If the Isobutanol market expands in this rate, its volume will reach 10 trillion gallon per year, representing a 50 trillion dollars market at current oil price level. Gevo has huge upside as the leading company in this fast growing market. Also, in terms of macro economy, the BRICS continues its growth, Japan and Eurozone are undergoing recovery from strong economic incentivizing plan, and America is slowly stepping out of the influence of the 2008 Financial Crisis. Thus, in this favorable market, the demand for crude oil will keep growing. International Energy Agency (IEA) predicts that the demand for crude oil in 2014 will further rise 10%, which might lead to the increase in crude oil price level. However, compared to the volatile price fluctuation of crude oil, Isobutanol has strong stability in its price. With CEO works on keeping cutting its production cost, Isobutanol will sooner or later be widely accepted by the market.
(Five-year Crude Oil Price)
As CEO Dr. Patrick believes: "Even at $60 oil, I have a market opportunity," he said. "At $130 oil, I have a humungous market opportunity." From the worldwide distribution of Isobutanol market, China takes up 1/3 demand for Isobutanol. Accordingly, Chinese Government expects to use biofuel in 15% of its public transportation by 2020 mentioned in the recent "12th Five-Year Plan" Gevo successfully predicts this trend, and Gevo had already set up a production line in Malaysia. COO of Gevo said its 50% market will be in Asia while China will be one of the important clients. Since Isobutanol is a relatively new technology, government limits its percentage to be blended with gasoline is only 16%. If the policy is deregulated in the future when Isobutanol is fully testified by the market, its demand might surge and bring huge profits for Gevo.
Gevo is strong in research and innovation. Owning more than 450 patents, Gevo stands out even in worldwide range. Gevo's superior technology in Isobutanol enables it to convert the ethanol production lines into Isobutanol in really short time. Thus, Gevo can merge other ethanol companies to enlarge its production volume. In April 2013, Gevo acquired one critical patent: the foundational methods for low-cost isobutanol production at commercially relevant titer, productivity, and yields. "This is a milestone achievement toward our goal of making commercial isobutanol a reality," said Brett Lund, Gevo's executive vice president and general counsel. That means, if any other companies want to produce Isobutanol, they would need Gevo's technology. In March 2013, in the lawsuit between Gevo and another Isobutanol manufacture Butamax, Gevo enhances its position in Isobutanol industry again by winning the lawsuit. Gevo's patent allows it not only holds dominant position in Isobutanol production, but also many other products derived from Isobutanol.
Governments and big companies all love Gevo. Since its Isobutanol is a sustainable energy source with huge potential in the future, Gevo gains strong support from US government and big companies. Using green energy is not only beneficial to a company's public reputation, but also prepares it to meet the future trend. Coca Cola plans to produce all of its PET bottles using PlantBottle technology they worked together with Gevo and other two companies. By 2009, Coca Cola had produced 18 billion bottles in 28 countries with Gevo's technology, which saves 400,000 barrels of crude oil. Gevo has partnership with many companies. Coca Cola has been working with Gevo for a long time by providing its research expense in 100% recyclable PET bottles (PlantBottle Technology). Other than that, Coca Cola, Procter & Gamble, Nike and Heinz formed Plant PET Technology Collaborative in June 2012 to facilitate the use of PlantBottle technology. Recently, the announcement by Ford to join drove Gevo's stock price to skyrocketing. If Ford only uses this technology in producing the interiors for Fusion cars, this can already save Ford 295,000 Gallons of gasoline or 6000 barrels of oil.
(Ford Fusion Hybrid with PlantBottle technology meets the public on recent Los Angeles Auto Show)
U.S. government also gives strong support to those biofuel companies. President Obama announced in 2011 that the U.S. Departments of Agriculture, Energy and Navy will invest up to $510 million during the next three years in partnership with the private sector to produce advanced drop-in aviation and marine biofuels to power military and commercial transportation. Isobutanol from Gevo was chosen out of four alternative energy sources (natural gas, ethanol, isobutanol and biomass) to be used on testing by Air Transport Association, US Air Force, and US Coast Guard. Isobutanol received good feedbacks from Gevo's partners and US military will request more Isobutanol for use. What's more is that Gevo also reach agreement with Germany Lanxess in 2010 on providing them 20 million gallons of Isobutanol annually until 2020. And from Ford's adoption of Gevo's technology, it's highly possible that other car manufactures will start to follow to use this technology. Isobutanol was tested by Mazda to substitute gasoline 100 recently in Le Mans competition and the result was amazing. Following are some feedbacks from Gevo's partners:
US Coast Guard: Mike Coleman, Project Manager at the USCG R&D Center stated: "We are pleased so far with our testing of isobutanol as a potential alternative to ethanol as a blend stock in gasoline for marine applications." Isobutanol is a biofuel that compared to ethanol, has higher energy density, lower RVP, and does not present phase separation issues seen with ethanol. "All testing so far has been positive, and when the Yorktown tests are completed next year, we expect to have the information available to allow a decision on whether 16.1% Isobutanol fuel blends will be certified for use in the Coast Guard gasoline engine fleet.")
Mazda tested Isobutanol as fuel: Dyson Racing introduced the fuel into ALMS competition last fall at Petit Le Mans at Road Atlanta. Concept car MX-5 Miata runs on isobutanol. Initially produced from feedstock such as corn and sugarcane, isobutanol provides higher energy content than many first generation biofuels and is one of five energy sources identified by the U.S. Government as part of the U.S. national energy policy.
Coca Cola believes in the potential of PET material: "While the technology to make bio-based materials in a lab has been available for years, we believe Virent, Gevo and Avantium are companies that possess technologies that have high potential for creating them on a global commercial scale within the next few years," said Rick Frazier, Vice President, Commercial Product Supply, The Coca-Cola Company.
Gevo has high possibility to be acquired by industry giant. Just like Shell acquired a Brazilian company Cosan producing ethanol. Since Isobutanol is highly likely to substitute ethanol or even gasoline, Isobutanol will definitely attracts the industry giant's attention. Also, from the use of PlantBottle technology by Ford and use of fuel by Mazda, Gevo will be car manufactures' new favor in the future and acquire this company in developing stage would be the best option. Finally, Gevo has leading technology in PET production derived from Isobutanol, it has huge demand from plastic manufactures. Thus, Gevo has considerably high possibility to be merged in the coming future.
Gevo's stock price is at reasonable level. Since the infection of Isobutanol production line in 2012 and led to the pause of production to improve the technology, Gevo's stock price had fell significantly. Gevo's management, foreseeing the huge potential of Isobutanol, also made a decision to fully stop ethanol production to transform into a company 100% focuses on Isobutanol production. The facilities are being retrofitted to produce Isobutanol. These led to the drop in company profit. Luckily, the infection issue was solved at the beginning of 2013 that met the standard of EPA. The lawsuit with Butamax on patent was just solved at the second quarter. Gevo is at a significant turning point at this moment. Because its Isobutanol is still in the testing stage by its clients, this makes Gevo's revenue looks weak. However, from all the feedbacks and future contracts, Gevo's Isobutanol is gaining acknowledgement.
Gevo has an efficient and experienced management team. Dr. Patrick Gruber worked as CEO of Gevo since 2007. He is a representative at Future Energy Coalition which cooperates with the UN and other important world organizations and leaders in energy. He was also recognized by his important contribution to the environment and was awarded the George Washington Carver Award. Dr. Christopher Ryan, COO of Gevo, has worked in bio company for more than 20 years. And, Brett Lund, CLO of Gevo, is recognized as one of the most influential experts in Colorado. Brett worked in Ford prior him joining Gevo. Under this strong management team, we are confident that they will bring Gevo to prosperity.
Conclusion
We believe that Gevo is significantly undervalued at current price level. After the issue of infection, lawsuit and disappointing earning, all the negative aspects have baked into the stock price. In the coming future, Gevo will prove its advantage and gradually become profitable. As the increasing production lines, CEO expects that Gevo will turn to be profitable next year in recent Q3 conference call. With the rising demand and increasing production, Gevo's stock price will surge from current level. We are not surprised to see it test the 3-dollar level, which is 100% increase. From Wall Street's expectation to Gevo, their medium price target in a year is 5 dollars, nearly tripling the current price level. Putting it in a longer time frame, Gevo might reach 10 or even higher price level. We are longing Gevo and have initiated our position to accumulate considerable amount of stakes in Gevo.
Disclosure: I am long GEVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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