Ceres (CERE) launched their IPO a few weeks ago and after an extended bit of marketing during which one of the recent biofuel IPOs, Amyris (AMRS) failed to meet expectations. Ceres lowered the proposed range from $21 - $23 to $16 - $17 and is still trying to find enough buyers to complete the deal in the lower range.
But if Ceres succeed the newly discounted share offering of $16 to $17 might be a bargain. There is a long road of execution in front of them but if they do it our estimate of intrinsic value of $65/share will be achievable. Monsanto (MON) is an investor in the company so it's hard to see them going totally belly up.
Ceres is a development stage company in the bioengineering space. The company creates genetically modified and enhanced crops aimed at the energy feedstock market. The results, economics and early adoption all look encouraging, particularly in Brazil. The company plans to scale rapidly and drive a very high margin business model.
Positives, Neutrals and Negatives
- There is a massive, recurring, high gross margin market for their products. Biomaterials for energy production are in great demand and pressure to use non-food crops is a big positive for Ceres.
- Seeds are highly profitable and defensible. They cost little to produce one developed and can be sold at a good price that represents a small but high ROI item for the crop producer.
- Bioengineering is a marvelous science (with some risks noted below) that is capable of producing plants that grow fast and yield far more per unit of input and even some that can be irrigated by 100% seawater.
- Highly scalable business. The planting cycle creates annual steps in the growth of the company but each can be a multiple of the one before. 10x annual growth rates are very possible.
- Feedstock risk has been a recurring theme across multiple biofuel and biochemical companies. Ceres provides one credible path toward mitigating or even eliminating some of this risk.
- Ceres has invested heavily to obtain leadership in this market with over 300 patents (issued or pending) and substantial organizational knowledge around crop design.
- Top quality management team and sophisticated investor backing (including Warburg Pincus and Soros) gives Ceres the resources to compete effectively and continue to succeed in this market.
- Ceres has licensed much of their technology from organizations like Texas A&M. This has given them a scientific and technical advantage but also a dependency on these agreements.
- Competitors are massive and formidable but also strong candidates to eventually acquire a company like Ceres if they are successful. Monsanto is an investor in the company.
- The near and medium term growth for the company and their long-term model depends to a large degree on Brazil. Although an ideal market for Ceres it begs the question of whether or not Brazil is really a special case and their model won't scale into other geographies in the same way.
- Ceres is still a development stage company. Inflection points are notoriously difficult to predict in terms of timing and valuation at these junctures tends to be highly variable and typically ebb and flow with investor sentiment rather than changes in fundamentals. This one is for long-term investors.
- Bioengineered foods are a major trend but one that also may bring new risks. Sometimes our "improvements on nature" have gone awry. These risks are lower for a feedstock (rather than a food) producer like Ceres but they might be painted with the same brush as the other players in the market.
- Rules and regulations aimed at genetically modified seeds and crops are springing up in developed countries and being actively debated in emerging markets like Africa. Regulatory intrusions and even consumer behavior could impact the Ceres business plan.
Valuation is a little tricky on this one due to their early stage of growth. The long-term financial model of the company aims at operating margins of 47% to 63%. To put these in context the gross margins at Monsanto are 51%. If one believes these margins to be achievable and applied to a $400M revenue level in 2016 the company supports a per-share intrinsic value of $65.