Entering text into the input field will update the search result below

A Mixed Outlook In The Green Plains, Inc. Q2 Earnings Report

Aug. 03, 2018 10:17 AM ETGreen Plains Inc. (GPRE)3 Comments
Tristan R. Brown profile picture
Tristan R. Brown


  • Green Plains, Inc. reported Q2 earnings this week that were substantially better than analysts expected despite resulting in a negative net income.
  • The company's recently announced strategic shift toward more streamlined operations found some support as its cattle-feeding operations drove Q2 EBITDA.
  • Not surprisingly, Green Plains announced a large expansion of its cattle-feeding operations just before the Q2 earnings report was released.
  • Management was not nearly as upbeat about the ethanol export and domestic policy outlooks, however, and this sentiment was reflected in the Q2 data.
  • The company's share price continues to be quite exposed to events in Washington D.C. to the detriment of its shareholders in recent months.

Investors wanting to know just how underwhelming operating conditions were for ethanol producers in Q2 need look no further than the most recent earnings report from Green Plains, Inc. (NASDAQ:GPRE). The ethanol and agricultural commodities producer managed to beat the analyst consensus by a substantial margin on robust YoY revenue growth en route to its strongest diluted EPS result in any quarter since Q4 2016. Its share price, which has been beaten down in recent months (see figure), staged a nice rally in response. Despite all of this, however, the EPS result still came in as a loss at -$0.02 in the quarter that is usually the strongest of the year for the broader ethanol sector.

The company's share price began to struggle after management announced in the Q1 earnings report the start of a major strategic shift away from its circa-2015 diversification efforts in favor of a more streamlined focus on ethanol exports and high-protein feed ingredients. As I wrote at the time, management's decision was rational in the wake of last year's tax reform legislation and the stubborn presence of low ethanol operating margins, the latter of which has persisted despite the last year's large gasoline price rally. Investors were understandably disappointed, however, since the shift meant a reversal of the growth strategy that had contributed to its previous share price rally in 2016.

Any questions from investors about whether or not Green Plains intended to maintain its new export-and-protein strategy at a time when America's trade relations with many of the world's largest importers of U.S. ethanol have sharply deteriorated were answered shortly before the earnings report's release. On July 31, Green Plains announced that it was purchasing two cattle-feeding operations from Bartlett Cattle Company for approximately $16 million, excluding working capital (The working capital

This article was written by

Tristan R. Brown profile picture
My articles do not represent investment advice. Readers should perform their due diligence before investing in any security or fund that is mentioned by my articles.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (3)

ComputerBlue profile picture
Gpre overpaid for shoddy plants instead of investing in their best plants for less $/gal. They now want to operate flat out with plants that have been under capitalized and aren’t as efficient as their competitors.
FuriousA profile picture
Agreed. It amazes me that this company has pulled 2 complete 180s in a matter of months.

#1 -- They've gone from being a debt-financed accumulator of "cheap" ethanol assets to a distressed seller of "undervalued" ethanol assets in order to reduce debt rapidly.

#2 -- They've gone from being the responsible swing producer to support ethanol market fundamentals to now running flat out almost regardless.

What's even more embarrassing is that the analysts seem confused. One doesn't understand the switch from ethanol asset accumulator to ethanol asset seller. Here is his clue: interest expense = $22m vs EBITDA = $42m.

Another analyst isn't sure why they are expanding cattle if they are trying to reduce debt? Well because what they are trying to do is reduce debt relative to EBITDA, not just reduce debt you simpleton. If they can increase EBITDA enough, then it could be worth increasing debt to do so. But what they've concluded (and recent history has proven them out) is that increasing debt for ethanol EBITDA is what has led them to the sunken place and it is cattle (and food) that will now lead them out.

In just the 3-4 years I have spent following this company, I've never followed one so vulnerable or exposed to government regulation. Without doing anything wrong (like an oil spill), this company's fundamental rationale for existing (RFS) has been called into question, its capital structure has been up-ended (thanks to tax reform's limitation on interest expense), and its increasingly critical export markets have been thrown into disarray (thanks to getting tough on trade).

So that's three strikes and counting. I'm sure there's a giant opportunity here, but I think I'll wait until I see what these coming liquidations look like. Based on what the company has signaled, it would seem that each dollar raised from selling ethanol assets should be plowed first into any EBITDA-rich and accretive cattle-feeding or other food expansions, and failing that, used to reduce term debt.

So that begs the question of who is buying ethanol assets in a big way right now? I don't feel like there is an opportunistic short-term play here for existing players, as much as a long-tern foot in the door for China or Brazil. It makes a lot of sense for them to be opportunistic buyers esp as their currencies keep weakening vs the USD, In addition, there hasn't been this much capacity up for sale in a long time. My guess is that China is about to buy a lot of market share.
Tristan R. Brown profile picture
Thanks for commenting.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.