Gevo: Why The Third Quarter Could Be The Most Important Since IPO

Aug.13.13 | About: Gevo, Inc. (GEVO)

Gevo Inc (NASDAQ:GEVO), the worlds only commercial producer of bio based isobutanol, has made incredible strides over the last two quarters in the way of improving the fundamentals of their company. Essentially, GEVO has had to do a complete rebuild of the foundation of their company along with learn an entirely new operating process. They have successfully been able to do both along with begin commercial production, expand production to a second production train, and begin supplying the US Coast Guard with isobutanol. They have made all of these fundamental improvements to the company while the stock has remained largely unchanged since before production. This is what makes Q3/2013 so important.

GEVO has been able to accomplish, on schedule, all of the strategic initiatives outlined by management since the beginning of the new year. In fact, the company resumed production at it's Luverne Minnesota plant 14 days sooner than outlined in their Q1/2013 earnings call, no small feat for a company this size with the intricacy of their operating process, and remained 13 days ahead of schedule in announcing the starting of their second million-liter fermenter and GIFT system. The company has guided that they will be bringing online their third and fourth fermenters and GIFT systems in the third and fourth quarters of 2013. It is my opinion, based on a calendar that I have kept since early February that has been accurate to this point, that the third fermenter will be online by September 5th, should the company not experience any delays. The company would have until September 18th to bring the system online and remain on their original schedule set in Q1/2013. GEVO has made no indication that the initiating of their third and fourth fermenters is on a time based schedule rather than a results based schedule and both could be online much sooner than guided. I am basing my schedule on the original scheduling set in quarter one. Again, all of this ahead of schedule progress has been made with nothing but short term, underwhelming spikes in the share price.

So why does the third quarter hold so much value to the company going forward? In my opinion, the second quarter was the most important quarter to the company in that the entire operating process of the company was still in many ways unproven, the cash burn rate was in question(and with it fears of dilution), and the company had to prove to it's investors that they could hit a laundry list of checkpoints (including finding resolution in a legal battle with a competitor). They have done everything they have said and even surprised in driving down OpEx to help with the cash burn rate. My opinion of the importance of Q2/2012 was wrong as the market seemed disappointed with initial run rates at the plant and with the target-market product seeding rates guided in the Q2/2013 earnings call.

The third quarter becomes even more important than it would have been because it appears the market would like to see continued on schedule activations of the final trains and the results of production and seeding. GEVO plans to sell the isobutanol it produces in the specialty chemicals and specialty oygenated fuel blendstock markets. They plan to seed the target markets with initial shipments of product that will grow with the actual product being produced in larger amounts. The company, and the market, would like to see consistent delivery of product and consistently growing product creation, which will be entirely dependent on train activation and production ramp ups. So you can see how if one arm of the process is not executed on schedule and effectively, the expectations of the market will not be met.

The company also finds itself in a position that it was not expecting when it comes to filling its corn inventories. The price of corn has fallen significantly over the course of the last 8 months and GEVO is in a position to make very opportunistic purchases in the third quarter. This will help with margins and with overall cash burn for the quarter. The company was a net seller of corn as prices were much higher over the last two quarters which obviously was beneficial in several ways.

Finally, Q3/2013 will provide us with a good idea as to whether the company will be able to increase the performance of their yeasts, reduce cycle time of the isobutanol production runs, develop any further relationships with refiners and blenders, develop any further interest in marine fuels and automobile fuels, and if they are approached as to partnering in smaller scale retrofits they referred to as "brown field plants" on the most recent call.

I continue to like GEVO as a short term and long term hold and continue to have high hopes for the rest of the year. I have been very impressed with the ability of the company to hit checkpoints and their ability to constantly improve fundamentals. The stock price of the company will eventually catch up to the lowering of uncertainty and the increasing of current and future revenues. I am amazed that the price has remained little changed since pre-production, even with the massive amount of risk that has been removed from the company at this point. GEVO does have a very high beta and will bring volatility to any portfolio but if you have some patience and understand that buying fear and misunderstanding can yield very large long term results, GEVO could be an attractive position to enter at these levels.

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.