NutraCea: Still Attractive, Despite Diluted Share Count

 |  About: RiceBran Technologies (RIBT)
by: Thomas Kelly

Due to NutraCea’s (NTRZ.OB) recent announcement of a private placement of 20 million shares of stock, I want to revisit my earnings estimates and valuation analysis of a week and a half ago. For new readers, I will provide a profile of the company, and then revisit my analysis from last week. This new analysis includes a revision of my earnings estimates in the wake of last week’s announcement of a 20 million share private placement.

Company profile

NutraCea, a health science company, engages in the development and distribution of stabilized rice bran and rice bran-based products for the consumer food and animal feed sectors. Nutracea’s patent protected, proprietary technology allows it to stabilize rice bran, the most nutricious part of the rice kernel. Before NTRZ, rice bran was a largely worthless byproduct of the rice milling process because it rapidly became rancid and unfit for consumption. It remains very inexpensive, as it has few applications without NTRZ’s technology. Nutracea sells this stabilized rice bran [SRB] for both human and animal consumption. Its products include food supplements and medical foods for humans and animals. The company is heavily involved with governments of developing nations in an effort to use its product to fight malnutrition in the developing world. NutraCea’s other customers include General Mills (NYSE:GIS), Purina, Archer Daniels Midland (NYSE:ADM), and several other Fortune 500 companies.


I have taken the same methodology in these estimates as in my original earnings estimates, and will calculate a lower and upper bound for earnings out to 2011. The notable change here is the share count, which has been adjusted to reflect an additional 20 million shares for 2007, as well as increased dilution going forward. Here is my lower bound for the estimates:


Now, here is my upper bound for NutraCea’s five year earnings estimates:


As in my previous analysis, these estimates assume that gross margins will be 50% going forward, which is consistent with management’s statements. SG&A expenses are projected to be $7.5 million in 2007, slightly higher than guidance given in the most recent conference call. Thereafter, SG&A is modeled to grow at 12% per year. The tax expense accounts for a $40 million dollar loss carried forward. I have heard that NTRZ may have up to $70 million in carry forwards, but I cannot find documentation of this, so I have used $40 million, which is derived directly from past income statements.

Obviously, the main change here is the share count, which I have increased considerably to account for the 20 million share private placement, as well as the warrants. As the fully diluted share count is 150 million, you will note that the estimates for shares outstanding are coming much closer to the fully diluted share count. Moreover, with last week’s private placement netting $50 million, the company now has the capital in order to build new plants. Therefore, there should be less room for surprise going forward on the share count issue.

Now, given the revised estimates, we can again estimate a five year growth rates at both the upper and lower bounds using the formula for Compound Annual Growth Rate. Plugging in the numbers for the lower bound, we find that the lower bound growth rate is 31 percent annually. Using the same process for the upper bound, we find the five-year growth rate to be 50 percent.

By using Price/Earnings to Growth analysis, we can then come up with a fair value for the stock at various growth curves. If the company is able to achieve the lower bound growth rate of 31 percent annualized, then given that a PEG of 1 represents fair value, the fair value of the stock price would be 31 x $0.16 = $4.96. This could be thought of as a lower bound “price target” for 2007.

If the company is able to achieve the upper bound five-year growth rate of 50 percent, the fair value of the stock price would be 50 x $0.28 = $14.00. This would be an upper bound “price target.” Because it will require people to significantly amend their outlook for the company, this price is unlikely to be reached until the company begins to show significant operating momentum.

Because the growth rates above represent upper and lower bounds, a better way to determine a fair value for the stock would be to take the midpoint of the two growth rates (as well as the midpoint of the 2007 earnings estimate) and use PEG analysis. Therefore, at a growth rate of 40 percent annualized, the stock has a fair value of approximately $8.91 (40 x $0.22).

Based on these figures, NutraCea appears to be very cheap, even after last week’s dilution of the share count. If we work backward using PEG analysis, we can see just how low the expectations for NTRZ really are. Assuming that NutraCea manages to achieve my lower bound ($50 million in 2007 revenue, which should translate into about 16 cents per share), it is currently priced at 18 times 2007 earnings. If we assume that the stock is currently trading at a PEG of 1, than we can conclude that investors are expecting a growth rate of just 18 percent annually for NutraCea. That is too low, given the fact that the company has made its plans for rapid expansion of capacity quite clear (See previous NTRZ posts). Nutracea remains capacity constrained, and with no competition, they will grow as fast as the can expand capacity, which will surely be more than 18 percent per year.

Obviously, a lot will depend on the company’s operating performance going forward, but given the fact that NutraCea remains capacity constrained and we have good visibility as far as their expansion plans, the company appears to have very little downside at these prices. In addition, NutraCea flashed a strong technical sign despite the dilution news on Friday by finding support at $2.75, the point of its recent breakout to a new 52 week high. As there had been some rumor of dilution before Friday, I believe that getting the news out of the way could bring buyers off the sidelines here.

Disclosure: Author is long NTRZ.OB

NTRZ 1-yr chart