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Story: A reader made me aware of SunOpta (NASDAQ:STKL), primarily because of its organic food lines, but also because it has some marginal business in ethanol. 90% of revenue comes from the SunOpta Food Group, 9% of revenue comes from Opta Minerals, and 1% comes from the SunOpta BioProcess Group. That last one is the one exploring cellulosic ethanol.

Organic produce has been a bit of a market darling for a few years now. We'll avoid the politics, the balkanizing turf wars, and the hype, since the only thing we care about here is the market direction for organic produce. The two best known plays on that are Whole Foods (WFMI) and Wild Oats (OATS). WFMI shows a steady smooth stock price increase for many years, until it broke down at the start of this year. OATS has a much choppier history, but generally trades between $10 and $15 until a breakout earlier this year from which it is now pulling back. So, that was a quick-and-dirty way to say that the easy growth in the organic food sector is probably over.

We'll ignore, at our peril, the mineral stuff. The BioProcess group doesn't actually produce ethanol. The main thing that they do is provide the equipment necessary to process any raw materials for downstream ethanol production. The main game here is surface area, so their systems are designed to pulverize, wash, explode, powder, or otherwise process the feedstock for maximum contact with the reagents that will be used for the production of the desired chemicals (ethanol being one possible target). That makes them sort of a picks-and-shovels play on the ethanol industry, although I have no handle whatsoever on how (we suspect very) competitive or balkanized this side (engineering of processors) of the market is. In addition, they don't have to mess with the whole enzyme issue, since they are upstream from that. On the other hand, they are likely to only get one-time, rather than recurring, revenue from each of their ethanol plant installations, since they profit from sales of the plant equipment, not the plant product.

Ethanol has a lot of interest right now (we were tempted to say hype, but some of it is justified), and cellulosic ethanol especially so. Abengoa in the biggest cellulosic ethanol producer, and SunOpta has sold their biomass pretreatment system to them, generating some buzz for themselves. That's a pretty weak link. We'll take a quick look at the numbers to see if they justify the stock.

Company: These guys are no start-up. They have been around at least since the 1980's, so operating earnings (what they really get to keep) are Net Earnings, not some other measure (e.g. EBITDA - earnings before interest, taxes, depreciation and amortization), since all those other long term or otherwise imposed expenses are operational at this stage of business development. From their 2005 annual report (pdf), they have nice healthy Y/Y top line growth from 2001-2005 of 31%, 64%, 54%, and 39% ($121M/$92.4M, $199M/$121M, $306M/$199M, $426M/$306M). In absolute terms that's a revenue increase Y/Y between 2001 and 2005 of $29M, $78M, $107M and $120M. They have a fairly consistent gross margin of about 16% +/- 3%. 2001 they had a net earnings loss. Net earnings growth Y/Y between 2002 and 2005 was 142%, 23%, and 24% ($8.97M/$3.70M, $11.0M/$8.97M, and $13.6M/$11.0M), or in absolute terms $5.27M, $2.03M, and $2.6M.

So, they are increasing their revenue by over $100M/year, but they are only increasing their earnings by less than $3M/year, and earnings growth rate is slower than revenue growth rate. That is, only about 2% ($2.6M/$120M) of their top line growth drops to their bottom line. Their top line looks good, but with that small a margin their bottom line is boring. Blah.

The bioprocess group ended 2005 with 10 employees (annual report, pg 23).

They reported Q1 2006 numbers Tuesday. Quarterly revenue up 55% Y/Y, net earnings up 47% Y/Y to $0.05/share. (Annualizing that gives $0.20 for the year, which is less than their reported 2005 earnings, so we're not impressed). All their growth came from the food products division.

Stock: They have been around for a long time, and a historic chart of STKL shows that they are currently trading near the all-time high of their price range:

With a 2005 EPS of $0.24, and a current price of ca. $10, that gives them a trailing P/E of ca. 40, which there is no way whatsoever to justify from their earnings growth. Ethanol and cellulosic ethanol may boom all over the world, but these guys, as explained above, won't make any money from it, and they certainly haven't in the past.

Their stock is up on hype. We might short.

Related: Ethanol Stocks Reviewed On Seeking Alpha

Source: Ethanol Stocks: SunOpta Has the Cellulosic Glow (STKL)