Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Gevo, Inc. (NASDAQ: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 discuss GEVO's upcoming earnings and break down why the progress made in the four months since GEVO's last earnings should either solidify CEO Patrick Grubers position running the company or be a catalyst for his removal. If you would like to familiarize yourself with the GEVO story on an in depth level I would recommend reading any number of the articles listed under the stock ticker on Seeking Alpha.
Lets get you up to speed on GEVO
It's been just over 3 years since GEVO raised 123 million dollars in an over-subscribed IPO. A company with so much promise that buyers continued to bid the price up 70% in the first two months the stock was trading. GEVO was to be a company like no other, something the market had never seen before. A lot has changed since then.
GEVO's biggest value proposition to investors at IPO was that it was a company that would require substantially less capital and time to get to profitability than other companies that forced the buyer to hold an equal amount of risk (mostly biotech companies or other microcaps dependent on evolutionary breakthroughs). GEVO also gave investors the peace of mind of knowing that a market for its product was already established and that there was a willing and ready buyer from a joint venture standpoint to partner with (furthering the capital light approach the company was positioning to investors). What's not to like, right? You mean I don't have to hold this company for ten years while it develops into a juggernaut AND it has a low risk of diluting me while I wait? Go ahead and place my buy order now. Not so fast.
Making the case for Gruber to be held accountable
GEVO successfully hit all the fundamental checkpoints it had listed as goals in the early going and even managed to produce Isobutanol after making the initial switch from ethanol at its plant in Luverne Minnesota. That's where the problems began to snowball and CEO, Patrick Gruber, began to let the company goals mix with what I believe are his personal goals.
Patrick Gruber is a brilliant scientist. Lets just get that out of the way right now; the man is brilliant. Grubers claim to fame, and its a big one, is in biodegradable plastic. He's the genius behind the blockbuster chemical that helped create NatureWorks LLC (formerly Cargill Dow). In 1989 Gruber was given the responsibility by his then bosses at Cargill of finding new uses for corn. What he developed, now called NatureWorks PLA, would go on to change the world. For a full recap of Grubers brilliance and the many uses (extremely high margin uses) of NatureWorks PLA please click here.
I believe it was this massive success, and the time and seemingly endless capital given to Gruber while PLA was being developed (although Gruber created the first initial batches in his kitchen) that created the low sense of urgency we see from Gruber in his current role. Gruber hasn't made the connection that the capital markets value his work on a DAILY basis and that those valuations matter. At Cargill he had no set timelines and no checkpoints that required reporting to the public that could effect the image of the broader company. His only job was to eventually produce a product that would justify the capital being invested. Even that responsibility was partially free from pressure as Cargill's size and their partnership with The Dow Chemical Company (NYSE:DOW) helped negate the cost and time.
At GEVO, he is required to hit checkpoints, articulately express the progress being made towards those checkpoints, and actively manage the valuation. He has impressively failed at all of the above. GEVO's conference calls have been disgustingly vague and free from useful information and to make that even worse they have been incredibly boring. I'm not getting on a biofuel company conference call expecting fireworks and light shows but I do expect a certain level of enthusiasm to come from the CEO. The fact that GEVO hasn't been able to give any form of guidance, on anything in any regard to the company, other than "trust me" in over a year is unacceptable at best and negligent at worst. The last four months have been particularly painful as GEVO failed to PR a single event prior to finally PR'ing an event a few days ago. Four months. Four months after the company just failed yet again to meet a checkpoint on time and also announced intentions to raise cash and then successfully raised cash in a dilutive financing. You could make a case for Grubers removal of position from a conference call standpoint alone, but you also have the stock performance and his lack of buying to show confidence in the company to fall back on.
The company has fallen from the mid $20's shortly after IPO to just under $1.40 currently.
I could stop writing right now and the majority of the investment community would agree he has failed to meet the obligations of his position. At the end of the day, the most important metric for a CEO to hit is share price growth. At least a CEO who's main concern is share price growth. I honestly question with the way Gruber has managed the conference calls and with the vague answers and lack of communication in general with the investing public if Gruber is motivated by generating returns for his bosses, the shareholders. To be clear, I'm not sure if Gruber has distinguished the difference between getting his product to market eventually, and watching that product help the environment, or getting the product to market in a fashion that would reward early investors and investors in general. GEVO has had to execute extremely dilutive financing (as talked about above), much more dilutive than if the stock price had been better managed, that has helped to push the stock price down and will no doubt at least slow the stock price on the way up should the company show success. The shortcomings at GEVO haven't been entirely Grubers fault as setbacks were to be expected but the CEO is held responsible for the success and failures of a company. Especially if that said CEO cannot provide reasonable timelines of when he expects, and HOW he expects, the company to make up the shareprice losses. What Gruber has provided, when he feels like providing it, have been absolutely without value.
Finally, Gruber has failed to participate in any of the recent (or any) insider buys that have taken place during secondary offerings and has failed to buy shares on the open market at either time the company was near all time lows in the $1.20's. He is either unaware of how this looks to the public or doesn't care. In either case, it's unacceptable and another item on the laundry list of reasons why he needs to step down after the company reports earnings in two weeks, IF those earnings fall into the now predictable pattern of being massive disappointments.
His last opportunity
Now, all this being said, if GEVO reports in a few weeks that they are in fact producing Isobutanol on a commercial scale, that they have solved their contamination issues that caused the initial shut down of the plant, and gives GRANULAR guidance on all of the questions the investment community has been asking the last 13 months, I would not object to Gruber maintaining his position. He is the man behind the science, he is the man developing an executable operating process, he is the man who would then deserve to lead the charge to the lofty valuations I believe are ahead for GEVO. If GEVO again fails to meet the expectations of the company, I think Gruber must go. I really don't think the company has a choice at that point.
I've been a long time GEVO bull and continue to believe in the future of this company. I do believe they will take the next step forward on the upcoming conference call and announce the above points. I do believe they announce they will initiate delivery of Isobutanol to Sasol (OTCPK:SASOF), a major partner, and that they will give guidance. I remain invested and will continue to look for fundamental progress.
NOTE: I have asked investor relations at GEVO several times if Patrick Gruber would like to comment on the contents of this article. They have responded with "no comment" and have also had no comment on Gruber's compensation or the performance of the stock.
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.