The American Corn Belt is home to some of the most productive agricultural land in the world. Last year nearly 87 million acres were mobilized to make possible the production of over 15 billion bushels of corn. Few things are more predictable than Uncle Sam's dominance come harvest time. Except, perhaps, Wall Street's pessimism over renewable-fuel markets.
Concerned by political (and therefore regulatory) uncertainty surrounding the present and future state of corn ethanol, Wall Street has sent shares of Green Plains (NASDAQ: GPRE) to 52-week lows. The pessimism may have made sense in the early days of the industry, but let's be clear: The ethanol industry isn't going anywhere.
Today, it's a nearly 16-billion-gallon-per-year juggernaut. Growing global demand for renewable fuels makes ethanol one of America's best exports -- with over 1 billion gallons leaving our shores last year. And with plenty of spare capacity and a glut of corn, smart policy could increase production and export volumes handsomely.
But Wall Street appears to be punishing Green Plains stock without considering the long-term prospects. The favorable outlook for American corn ethanol, coupled with the company's strategic growth initiatives, make this under-the-radar-stock a smart buy.
The business, explained
Green Plains is the second-largest ethanol producer in the world with 1.5 billion gallons of annual production capacity, ranking behind only American counterpart POET. Ethanol is the obvious bread and butter of the business, bringing in the bulk of revenue and a significant amount of profits.
Earnings are impacted by the price of tax credits -- a fact central to Wall Street's perpetual pessimism -- but that's largely out of the company's control. If you believe the risk of regulatory uncertainty is overblown (as I do), then all you need to know is that management has constructed a finely tuned machine that makes money in all market environments.
This is made possible by the fact that there's a lot more to ethanol production than, well, ethanol production.
Consider how each business unit interacts with the company's bread-and-butter operations by supplying inputs or handling and processing outputs, as ranked by responsibilities:
Separating these responsibilities into business segments (and even assigning them to other companies) allows Green Plains to more fully optimize operations and create value from all parts of ethanol production. That makes it easier for management and investors to identify growth opportunities -- of which there are many.
- Partnership: The creation of Green Plains Partners LP provided more financial flexibility and legal protection to Green Plains while providing a tax-advantaged way to drop down noncore assets central to moving and selling products from the core business.
- Export terminal JV: Last summer Green Plains announced a 50-50 joint venture with Jefferson Terminal Logistics to build an export facility in Beaumont, Texas. It will provide a direct avenue to export ethanol and other products from the company, in addition to petroleum-based fuels. The U.S. exported 1 billion gallons of ethanol in 2016, up from just 37 million gallons in 2006. Given that 20% of the company's production today is exported, the completion of the first phase of the terminal in the second half of 2017 could unlock a sizable long-term opportunity.
- Vinegar: Last year Green Plains acquired Fleischmann's Vinegar, the world's largest producer of food-grade vinegar. Since the major input in vinegar production is ethanol, the deal was a smart move to upgrade the value of the company's core product with higher-margin revenue.
- Cattle feedlots: As if being the world's second-largest ethanol producer and largest vinegar producer weren't enough, Green Plains has been acquiring cattle feedlots at a furious pace. As a result, the company has gained a direct market for animal feed -- a byproduct of ethanol production -- and has added a new product to the portfolio: meat. The company is now the fourth-largest cattle feeder in the United States.
- BioProcess Algae: Green Plains owns 90% of the tiny joint venture, but the investment could prove to be a stroke of genius in the long term. Ethanol facilities create a steady stream of CO2 and waste heat during production, which just so happens to be two of the most important inputs to algae cultivation. The ultimate goal is to turn those waste products into valuable products, such as proteins or omega-3s, which could be added to animal feed already sold by the company, to increase selling prices. The process could also greatly reduce the carbon footprint of ethanol facilities, perhaps allowing existing ethanol production to qualify for higher-value tax credits. A few extra cents per gallon -- or $0.50 -- would really add up when spread across 1.5 billion gallons.
What does it mean for investors?
There's really only one way to put it: Wall Street's pessimism stems from outdated thinking. The American ethanol industry is quite strong today and too important economically to disrupt by removing or reducing subsidies outright. More important, a deeper look at Green Plains shows that it has been carefully investing to maximize the value it derives from all aspects of ethanol production. If you're looking for long-term growth, you'd be smart to buy this under-the-radar stock.
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