Editors' Note: This article covers a stock trading with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Gevo, Inc. (GEVO) is a renewable chemicals and next generation biofuels company focused on the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks.
This article will introduce or clarify 7 facts about GEVO that either contribute to their long-term future as a leader in their industry or could act as a catalyst for earnings growth (read stock growth) in 2014. If you would like to familiarize yourself with the GEVO story I would recommend reading any number of the articles listed under the stock ticker on Seeking Alpha.
1. GEVO's management team and staff as a whole have done this before: That's right. These guys have all been major parts of taking new technologies and either creating extremely profitable stand alone companies or selling the company to a larger company.
Outlast Technologies - helped grow company and their unique technology (tested in space and developed for NASA) into a profitable, patent protected, industry leader.
Natureworks LLC - (formerly Cargill Dow, LLC) - helped take company from lab scale to a 300 million dollar world scale production facility. Did I mention the company had a new technology in a bio based polymer? Anything here sound familiar?
Natureworks LLC w/ Pat Gruber - See above.
DuraTherm Inc - Mike's resume is long and distinguished but one of the most relevant items of experience was his tenure at DuraTherm. While at DuraTherm Mike helped facilitate a buyout of DT by Virgin Green Fund (at which before taking the GEVO position he was a Principal, he was also at VGF prior to taking the CFO role at DT) and Masdar Clean Tech Fund. DuraTherm had a patented, unique technology. See any similarities?
Outlast Technologies w/ Pat Gruber - See above.
Natureworks LLC w/ Pat Gruber and Christopher Ryan - Greg's role at Natureworks was the exact same role with the exact same goals and the exact same hurdles as his current role at GEVO. That worked out pretty well for his last company. See above.
The bottom line is if any team can get the job done at GEVO, it's these guys. They have a familiarity with each other and have already done the job at hand. That becomes huge when on the spot unexpected variables pop up.
2. GEVO's GIFT system is the real money maker, not the yeast, not the biocatalysts, not anything else: Why do so many people think GEVO will fail to produce Iso at a commercial scale? The simple answer, because it's never been done before. Understanding why is the key to the entire GEVO bull story.
To this point, the two major theoretical problems (some have been proven to be problems in reality) have been how to keep a sterile environment during the process of conversion and how to keep the biocatalysts from becoming less efficient and eventually stop working while in the actual fermenters. GEVO has seemingly solved the first problem of sterility by making the necessary changes it has had to make over the last year. That was simply a logistical issue that took time to figure out. They have moved on from dextrose to corn mash with no new issues. The second issue is a science problem. Most people don't know this, and this is a very crude explanation, but the Isob itself is toxic to the yeast used to help conversion. What happens is the yeast essentially becomes "drunk" and slowly becomes less and less efficient until it stops working at all. The GIFT System is the key to the entire puzzle in that it effectively skims the Isob off the top of the process to stop the yeast from getting drunk. That's it. That's the reason why GEVO will succeed and their competitors won't. They don't have a solution to the science problem and they can't get one, without paying GEVO of course.
3. Although GEVO would like to own the plants that produce Isob, they simply can't: Or any chemical they can make for that matter. One thing GEVO has been consistent about has been that they always make decisions based on the back end of the company's future. They proactively slowed their restart progress to make sure they had their operating process down to a science (this is still ongoing), they raised equity cash to pay down debt, etc. These guys have always operated under the assumption that they are going to be a multibillion dollar company someday soon. That being said, they understand that they cannot meet the demand for Isob, and further down the road Paraxylene, themselves owning the plants. They value their licensing business, in my opinion, more than the business of owning plants and selling product themselves. This capital light, RAPID expansion business model is the only way that they can move to meet demands that will begin to backlog. They already have obligations for more than the capacity of their first two plants out as far as 2015. That's for Isob alone and the Paraxylene and Paraxylene derivative market is arguably larger than the Isob market. Bottom line, GEVO desperately wants to get their initial plant right the first time for a laundry list of reasons but the largest being that it's a demonstration for their licensing business, which in the opinion of this author, is the end focus of the company as a whole.
4. If GEVO can capture, between owning and licensing, just 1/2 of 1% of the annual global sales in gasoline blendstocks and Paraxylene (PX)/ Polyethylene Terephthalate (PET), they would do 1 billion in sales: I just threw a big number out there so let me clarify. First, and probably most importantly, GEVO is categorically the closest company to being able to produce non petrol derived PX/PET on a commercial scale and with their advantages as a gasoline blendstock (over current products), both of these are WELL within reason. Maybe not right away, but within a shorter timeframe than most realize. GEVO has huge letter of intent agreements with major corporations such as Toray, Coca-Cola, and Ford. A huge percentage of the non petrol derived PET is used to make plastic bottles with the other usage going to fibers and films. GEVO has established partnerships with a diversified group that would spread its usage across industries and across global marketplaces. It's also important to realize that GEVO's value proposition AND margins for PX/PET both grow as the spread between corn and oil grows. As a licensing focused company, there is no limit to the rate of growth or the acquisition of licenses globally. They don't need to complete one plant before moving on to the next, which would be the situation if they wanted to own instead of licensing. They can on an overnight basis have licensed, producing plants across the globe. The sales figure above is also assuming no sales from any other product in GEVO's portfolio. The PX/PET story is probably a 2015 story, but depending on the work being done at GEVO's Silsbee Texas plant, it could be much closer than that especially considering the huge companies listed above that would be providing the demand and the many that would be sure to follow.
5. The big money behind GEVO also happens to be smart: This isn't always the case. Virgin Green Fund alone has invested over $2.5 billion into 60 transactions that have formed their book of companies, which included GEVO and DuraTherm, two companies with similar business models and similar endpoints. I would say their major contribution to GEVO would be in helping manage (current CFO is a VGF principal) and helping lead down the road of a possible sale to a larger company. These guys are the best in the business for this market cap and sector when it comes to doing that. Khosla Ventures has a more diversified book but has made a point to be heavily invested in the advanced hydrocarbon and cellulosic alcohols sectors, investing in GEVO and several other competitors, further emphasizing their belief that the revenues will justify the risk. Finally, Malaysian Life Sciences Capital Fund, ran by Burril & Company and Xeraya Capital, brings a unique expertise to GEVO when it comes to strategic partnering, an invaluable practice that helps build value in companies and helps accelerate their growth and development. So what's the bottom line here? Nobody involved gets involved to lose money. At the end of the day these guys find a way to make it work and in this case "it" is GEVO.
6. GEVO will be giving guidance on their next CC: There are several reasons that make GEVO hard to value. Outside of the fact that GEVO refuses to comment on volumes, margins, or essentially anything that would help inspire confidence from an investor standpoint, they also have a wide spectrum of products that they can offer and sell, and depending on the particular mixture of products, the volumes needed to become EBITDA positive change. Couple this with the fact that at any point in time GEVO could sign and execute a licensing agreement that could drive both product mixture AND volumes needed down and you can see why the stock has such volatility. GEVO, and more particularly Pat Gruber, has been hesitant to give guidance over the last year in an effort to avoid setting hard timelines and expectations in case they wanted to do exactly what they did, slow the startup process to refine the operating procedures. From what I've been told by Mike Willis and from what Pat Gruber has said on previous calls, GEVO should be giving "more granular guidance" on the next CC. That should go a long way into establishing a market cap bottom for the company, especially if it coincides with the plant being commissioned and/or the announcement of any other catalysts (licensing, product delivery schedules starting, etc.). Look for this, yes something as simple as guidance, to be a turning point in investor confidence and the stock price for that matter.
7. GEVO's huge partners, namely Coca-Cola and Ford, can and are pressuring supply chain partners to work with GEVO to meet goals: It's pretty obvious that Coca-Cola (KO) and Ford (F) have a vested interest in GEVO doing well. Unfortunately, neither can invest in GEVO from an equity or a debt standpoint. Both companies will lean heavily on the superior economics that GEVO can bring to the table when it comes to producing Isob from renewable feedstocks at a commercial scale when compared to petroleum derived alternatives. Obviously, if the price of oil continues to rise, GEVO will become more and more valuable as a partner. This interest has allowed GEVO to leverage their associations and will become more evident as time goes on. Bottom line, when you're not the biggest guy in the room, it helps to know the biggest guys in the room.
GEVO is a complicated company doing very complicated things. If you don't fully understand just one part of their story you can't understand the entire picture. GEVO's science behind the business model is unique in that they have proven their technology and that there is already an existing market for the their products, which are usually your two largest risks involved in a tech company. It's also very easy to confuse GEVO the tech company with a commodity company. GEVO does in fact produce a commodity, a valuable, versatile, desired commodity, but GEVO's value as a company isn't in the commodity it produces. The big value in GEVO as a company lies in the fact that they can and are willing to show other companies how to produce the commodity that THE LEARNING COMPANY needs. That fact alone allows them to be a global company without owning a substantial amount of physical assets or doing most of the labor involved in either process. That allows them have a limitless upside with no time constraints placed on growth. Obviously their model and future as a company is dependent entirely on them successfully commissioning their Luverne Minnesota plant and doing this in the next six months or so. I happen to believe they will get this done and continue to rapidly expand their business both as an owner and a licensing company. I remain bullish on the stock.