Is There Really Upside in Biofuels Stocks? (ADM, VLO, GPRE, PEIX, SZYM, GEVO, AMRS, CDXS, KIOR)

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Our series on expected upside in stock prices continues today with a look at the biofuels sector. What you are about to see are numbers that, for the most part, defy gravity. With just two of these companies paying a dividend and only three with positive expected earnings, investors in most of these stocks have to ask themselves if they’re feeling lucky today.

The companies we’ve looked at include ethanol makers Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Green Plains Renewable Energy Inc. (NASDAQ: GPRE), and Pacific Ethanol Inc. (NASDAQ: PEIX). Biofuel and biodiesel makers include Solazyme, Inc. (NASDAQ: SZYM), Gevo, Inc. (NASDAQ: GEVO), Amyris Biotechnologies Inc. (NASDAQ: AMRS), Codexis, Inc. (NASDAQ: CDXS), and Kior Corp. (NASDAQ: KIOR).

To be fair, ADM and Valero don’t depend exclusively on ethanol production for revenues and profits, whereas the others do depend exclusively on their biotech products, even if the products are not used exclusively for fuel. Even the ethanol makers that face a loss of their current $0.45/gallon federal subsidy at the end of this year could feel a pinch in revenue and profit. Current US demand for ethanol is being exceeded by ethanol producers, and unless service stations begin widely to adopt the recently approved 15% ethanol blend, there’s not much reason to believe demand for ethanol will grow.

As for the bio-fuel makers, their problem is scale. And given the recent government losses trying to help Solyndra, Evergreen Solar, and Beacon Power reach scale, prospects for government investment in scaling up bio-fuels are dim at best. The best thing that could happen to any of these bio-fuel makers is to be acquired by either a big ethanol maker or an integrated oil company. No such announcements are rumored, however.

All data from Yahoo! Finance, and current prices were gathered just before noon today.

Archer Daniels Midland Co. (NYSE: ADM) has a median target price of $33.00 from 13 brokers. Shares are trading today at $29.01, for an implied gain of $3.99, or 14%. ADM’s forward P/E is 8.61 and the company pays a dividend yield of 2.2%. The stock’s 52-week trading range is $23.69-$38.02, and at today’s price that’s about 22% above its 52-week low and 24% below the 52-week high. ADM was included in our review of food processors just last Thursday, and since then it’s target price has fallen by -$2/share. The drop is probably more related to ADM’s shrinking margins in other parts of its business. Lower corn prices will have a bigger negative impact on the company’s trading business than they will on ADM’s ethanol business.

Valero Energy Corp. (NYSE: VLO) has a median target price of $31.00 from 14 brokers. Shares are trading today at $25.65, for an implied gain of $5.35, or 21%. Valero’s forward P/E is 6.01 and the company pays a dividend yield of 2.3%. The stock’s 52-week trading range is $16.40-$31.12, and at today’s price that’s about 56% above its 52-week low and 18% below the 52-week high. The market for crude oil is currently wobbling between contango and backwardation. What that means for a refiner like Valero is that if contango continues, crude prices will be higher in the future and refiners will get a boost due to the differential between WTI and Brent. If, as today, backwardation takes hold, and futures prices for crude are lower than they are today, refiner margins will be squeezed as the price spread disappears. Crude prices are far more important to Valero than ethanol prices, particularly once the subsidy disappears.

Green Plains Renewable Energy Inc. (NASDAQ: GPRE) has a median target price of $14.27 from 6 brokers. Shares are trading today at $10.18, for an implied gain of $4.09, or 40%. Green Plains’ forward P/E is 6.24 and the company does not pay a dividend. The stock’s 52-week trading range is $8.34-$13.00, and at today’s price that’s about 22% above its 52-week low and 22% below the 52-week high. Green Plains beat analysts’ expectations when it reported quarterly earnings a couple of weeks ago, and the better new is that the company now gets 40% of its operating income from something other than ethanol. In September the company purchased 3.5 million of its own shares from its largest shareholder at $8/share. Not a bad deal.

Pacific Ethanol Inc. (NASDAQ: PEIX) has a median target price of $0.96 from a single broker. Shares are trading today at $0.72, for an implied gain of $0.24, or 33%. Pacific’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $0.25-$7.98, and at today’s price that’s about 188% above its 52-week low and 91% below the 52-week high. After struggling to stay afloat, Pacific Ethanol last week said that it had retired the majority of its $35 million convertible debt six months ahead of schedule. The stock has gotten a boost from the news, but it is hard to see a lot more upside here, given the coming end of the federal subsidy. Still, there is decent action in the stock, which trades about 3.8 million shares a day on average, but it remains a timing play.

Solazyme, Inc. (NASDAQ: SZYM) has a median target price of $22.00 from 7 brokers. Shares are trading today at $9.20, for an implied gain of $12.80, or 139%. Solazyme’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $7.68-$27.47, and at today’s price that’s about 20% above its 52-week low and 67% below the 52-week high. A Continental Airlines flight today from Houston to Chicago will use a 40%-blend of Solazyme’s bio-jet fuel. And United Continental Holdings Corp. (NYSE: UAL) has said that it will buy 20 million gallons of the stuff fuel next year to blend with petroleum-based jet fuel. That’s good news, of course, but hardly enough to whip up much enthusiasm for stock that came public in May and has seen its share price dive pretty consistently since then.

Gevo, Inc. (NASDAQ: GEVO) has a median target price of $17.00 from 7 brokers. Shares are trading today at $7.16, for an implied gain of $9.84, or 137%. Gevo’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $5.32-$26.36, and at today’s price that’s about 35% above its 52-week low and 73% below the 52-week high. Gevo reported losses in the third quarter that exceed estimates, and EPS losses for the fourth quarter have gotten worse as a result. The US patent office last month refused to re-examine a patent denial for one of the company’s products. The company has a deal to supply 11,000 gallons of its fuel to the US Air Force for testing and a $5 million grant from the Department of Energy to work on making cellulosic ethanol. Neither is a game-changer, and that’s what Gevo needs.

Amyris Biotechnologies Inc. (NASDAQ: AMRS) has a median target price of $25.00 from 7 brokers. Shares are trading today at $12.99, for an implied gain of $12.01, or 92%. Amyris’ forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $12.95-$33.99, and at today’s price that’s less than 1% above its 52-week low and 63% below the 52-week high. The annual low was set earlier this morning. Amyris has found a market for its algae-based products, but not as fuel. The company produces oils that are used by many cosmetics manufacturers. That’s a nice line of business, but a few thousand gallons of cosmetics doesn’t generate the same amount of revenue as several million gallons of auto and jet fuel.

Codexis, Inc. (NASDAQ: CDXS) has a median target price of $13.00 from 5 brokers. Shares are trading today at $5.13, for an implied gain of $7.87, or 153%. Codexis’ forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $3.91-$12.24, and at today’s price that’s about 31% above its 52-week low and 58% below the 52-week high. Like Amyris, Codexis has found another market for some of its products. The company makes a testing kit for pharmaceutical manufacturers. Biofuel contributes little to the company’s revenue or profit, and, again like Amyris, the newer businesses don’t have the scale of jet or auto fuel.

Kior Corp. (NASDAQ: KIOR) has a median target price of $20.00 from 7 brokers. Shares are trading today at $15.75, for an implied gain of $4.25, or 27%. Kior’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $8.88-$23.85, and at today’s price that’s about 77% above its 52-week low and 34% below the 52-week high. Kior priced at $15/share at its IPO in June, and after falling below $10/share and rising above $20 share, the stock is back to a small gain today. The company’s current market cap of $1.63 billion is nearly triple that of either Codexis, its nearest rival from the bio-fuel makers. There is no fundamental explanation for that difference, which could mean that this stock is terribly overpriced at current levels.

Paul Ausick