In 2009, a comprehensive set of scientific studies determined that plastics contribute to the onset of fatal diseases and increasing oil consumption. Since that time, consumers, activists, and most importantly governments have become more active in seeking alternatives to plastic.
This has opened the door for shares of Cereplast (CERP) to triple.
Cereplast offers multiple lines of biodegradable plastic alternatives and is the only publicly-traded pure play prepared to take advantage of this opportunity. Pursuant to the dire findings regarding plastic, governments started taking surprisingly fast action. By the end of 2010, Italy had already placed a country-wide ban on plastic bags. Every country in the EU is expected to have a similar ban in place by 2014. Several other initiatives are underway worldwide. Just do a Google search on "government initiatives to ban plastic" and you will literally find hundreds of initiatives that promise to put CERP’s revenue growth on the fast track.
Indeed, the company's revenue growth is already spiking. On April 18, management announced that first-quarter revenue would exceed $7 million, which is more than the company made in the entire year of 2010. Management also raised full-year guidance to $28 - $34 million.
This represents the impact of early bans like the one in Italy. Italy only represents an estimated 2% of the worldwide consumption of plastic bags. As larger countries begin to enact similar bans, CERP's revenues should be fueled for years to come. And we're only talking about plastic bags, a small percentage of total plastic utilization.
Investors can expect a groundswell to occur rapidly and justifiably so. The aforementioned studies found that plastics like Polyvinyl Chloride (PVC) are responsible for increasing the occurrence of heart disease, diabetes, and cancer in humans. The effects of plastics on the environment were found to be equally horrific (groundwater poisoning, wildlife poisoning, and habitat destruction). Worst of all, the U.S. Centers for Disease Control and Prevention determined that 95% of adults had detectable levels of BPA in their urine…and 93% of children.
You can see details regarding the studies here.
To top it all off, it was determined that about 8% of the world's oil production is used to manufacture plastics. The implications of replacing plastics for our health, economy, energy independence, and household budgets are obvious. The implications for CERP are obviously favorable for shareholders.
The company has already entered into several multi-million dollar agreements with European manufacturers, many of which were signed over the past few months. It has also opened a European office in response to growing demand. An analysis of this demand and conversations with management suggest that the company could generate $100 million of revenue in 2012, producing $0.80 of earnings per share.
50% growth could follow in subsequent years. This is validated by the fact that management is in the process of expanding its manufacturing capacity to several times its current levels. Last week, CERP announced plan to open a new plant in Italy with 220M pounds of capacity. This is nearly triple the 88.4M-pound capacity of its Indiana plant, which itself is not yet running close to capacity (but has 500M-pound potential). It’s no wonder -- on its most recent earnings call, CERP’s CEO stated that the company is having a hard time keeping up with demand.
Thus far, investors have yet to discover CERP and do the math. However, the company is gaining mainstream visibility. Last week, the company was invited to appear on Good Morning America, which can be seen here. Looking at its valuation, a P/E ratio of 25x (very reasonable for company growing 50% per year) would result in a $20 stock. Yet, its stock currently trades in the $5 range, making CERP the latest addition to the list of companies that are poised to triple.
Disclosure: I am long CERP.