Danimer Scientific: Standing Strong At The Selloff Floor

Nov. 09, 2021 11:34 AM ETDanimer Scientific, Inc. (DNMR)14 Comments
Nicholas Calhoon profile picture
Nicholas Calhoon
99 Followers

Summary

  • Danimer stands to soon lead at the frontier of a very young bioplastics industry poised to expand by 17.4% annually as preferences increase towards ESG products.
  • Danimer's flagship product Nodax PHA could break the bioplastics market in the next few years with its faster decomposition time and ability to decompose in bodies of water.
  • The company has brokered relationships with numerous large brands including PepsiCo and Mars Wrigley.
  • The 2021 sell-off that dropped DNMR from its high of $66.30 in February to a low of $10.73 has decelerated, bringing the budding growth company to a reasonable valuation.

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Transparent and crushed plastic bottles with blue caps on a yellow background. Recycling and environment concept.

Antonio Saez Caro/iStock via Getty Images

Investment Thesis

As the global economy begins to adopt ESG products in response to shifting consumer preferences and regulations, Danimer Scientific (NASDAQ:NYSE:DNMR) is poised to soon lead the bioplastics industry that will supply this broad shift. The company has maintained strategic relationships with companies like PepsiCo (PEP) and Mars Wrigley and continues to report favorable progress on its Nodax PHA-based resin, which has proven to degrade faster than industry-leading PLAs and is the only biodegradable plastic proven to decompose in water.

Overview of the Bioplastics Industry

The foundation of DNMR’s potential is the potential of the bioplastics sector in which it competes. The global bioplastics market is expected to reach $16.8 billion by 2030 at an estimated CAGR of 17.4% from 2021-2030. When bioplastics were first introduced, analysists were skeptical that consumers would truly value ESG products, but favorable legislation across the globe paired with a continued trend in preferences towards these products has established bioplastics as a viable industry, albeit one that remains in early stages of development.

Biodegradable materials only make up 0.5% of the total plastic packaging produced today, but governments and numerous consumer staples and retail companies are expressing a strong interest in transitioning to plant-based packaging. The front page of Coca-Cola’s (KO) company website bolsters the company’s mission to “Create a World Without Waste.” Nike’s (NKE) mission statement specifically proclaims its mission to make its products more sustainably. Furthermore, governments are beginning to act to reduce carbon footprints, with the European Union recently pledging to reduce single-use plastic consumption by 80% by 2022. This outlook presents a strong opportunity for ESG companies to capitalize on these shifting tides at a time when ESG products are in high demand but low supply.

Why DNMR Will Break Bioplastics

This brings us to DNMR, the company that will break the young industry. DNMR is a biotechnology company focused on developing more effective and efficient bioplastic materials to be used in consumer products. The company is currently focused on Nodax PHA, a polyester derived from canola and soy seeds that is 100% bio-degradable, FDA approved for food contact, and able to bond with paper and other materials.

What’s so special about Nodax PHA? PLA plastics currently dominate the market due to their low costs, but their drawbacks are pushing companies to find other solutions. Whereas PLA plastics take too long to degrade and cannot be fully certified, PHA plastics will decompose in 90 to 120 days. Additionally, PHAs are the only bioplastic that can fully degrade in the ocean, freshwater, soils, and through anaerobic digestion, giving it an edge over other comparable materials. At this moment, PHAs only make up 5% of the bioplastics industry, giving them a large potential for growth within the industry, and currently the only U.S. manufacturer of the resin is – you guessed it – Danimer Scientific.

Global Bioplastics market

Source

Naturally, this gives DNMR an edge over its competitors, and many big-name consumer staples companies have taken notice. Since 2015, DNMR has executed multiple contracts with brands to fine tune their products to the needs of these notable corporations. This includes companies like PepsiCo, Mars Wrigley, Bacardi Limited, Genpak, and Nestle (OTCPK:NSRGY), all of whom look to use DNMR’s PHA-based resins in plastic films, bottles, packaging, straws, coffee cups, and more. These R&D capabilities will pave the way for future business as soon as their PHA-based resins meet agreed upon standards. Since packaging makes up almost 2/3 of all bioplastics revenue, these deals will allow DNMR to take over an extensive share of the industry should they come to fruition.

Is Danimer meeting expectations?

Of course, these are high expectations to place on a company that has yet to attain profitability, but DNMR’s consistent revenue growth and PHA progress are proving the company has what it takes to take over the industry. Revenues have increased every year since 2018, with an average quarter-over-quarter growth rate of 6.64% since March 2020, outpacing the growth of the bioplastics industry at large. In the last twelve months prior to its 2Q 2021 earnings, revenue increased by 33.14%.

DNMR annual revenues

Source: Image created by author with data from company filings

DNMR’s EBITDA and EBIT in the last twelve months prior to its 2Q 2021 earnings were -$38.4 million and -$45.5 million respectively, but this unprofitability is only indicative of how young the company is. Investors may initially worry over the fact that DNMR’s earnings have steadily decreased in the past couple years, but this trend is entirely due to the fixed costs the company has incurred in its recent moves, namely being its $152 million acquisition of Novomer Inc. and its continuing work on its Kentucky plant. Not accounting for these fixed costs, DNMR has not only surpassed recent revenue growth expectations; it continues to reinvest in itself in order to increase its efficiency to a level that will allow it to meet the future demand in expectations that analysts and investors alike are anticipating.

The most important indicator of DNMR’s competitive advantage is the measurable progress of its PHA-plastics. While Nodax PHA is DNMR’s key to taking over this explosive industry, they only encompass a small portion of the company’s current revenues. This, however, is already changing. This year PHA-based products jumped to 29% of the company’s total revenue in contrast to the mere 7% it stood at a year prior. These products remain in early stages of development, but as DNMR perfects these cutting-edge bioplastics, investors should expect these products to begin driving up profits in the future. This 22% jump in revenue share is just the beginning.

Successful business moves

Now for PHA plastics to be fully integrated by these large corporations, DNMR needs to continue to drive down costs and increase production capabilities. DNMR has already taken strides to achieve this goal. The company’s August 11th acquisition of Novomer Inc., one of the forefront developers PHA chemical conversion technology, for $152 million has given the company a massive leg-up against its competitors by doubling its patents, arming it with a new PHA research center, and allowing it to integrate Novomer’s own PHA “Rinnovo” into its line to lower its average production costs. This allows Danimer to possess a wide range of manufacturing processes and every tool necessary to continue to innovate within a relatively young sector. Similarly, the debottlenecking initiative at DNMR’s Kentucky plant will continue to significantly lower production costs at one of its two large plants, with Phase 2 of this project scheduled to begin in 2Q 2022.

Has this growth expectation already been priced in?

These same expectations of its PHA plastics initially exploded DNMR’s price by almost 600% after its SPAC merger at the start of 2021, but at the tail-end of the ensuing sell-off DNMR is back to a reasonable valuation given its current revenues and growth potential. The sell-off dropped the company from a high of $66.30 in February to a low of $10.73 in August. At the time of writing, DNMR sits at $19.88 amid its second surge in the last three months. The specialty chemicals industry in which DNMR competes has an average Total Enterprise Value to Total Revenues ratio of 4.4. With a total revenue in the last twelve months equivalent to $52.5 million, DNMR’s estimated Enterprise Value should be about $594 by comparison, leading to an estimated share price of $6.08 per share based on industry averages. The discrepancy between this much more conservative valuation and the current share price of $18.99 lies in DNMR’s high expectations of growth over the next few years. Analysts expect total revenue to reach means of $63.38 million, $168.55 million, and $294.86 million by the ends of 2021, 2022, and 2023 respectively. Given DNMR’s PHA-potential, grounded in its relationships with multiple large corporations and industry-leading production and research capabilities, these estimates are more than justified as DNMR begins to mature and take over the bioplastics industry. Yes, $19.88 may not be a discount compared to its peers, but buy-and-hold investors looking to the medium to long-term shouldn’t worry over a few dollars. Future revenues seeing 100-150% annual growth over the next few years as the company matures will compensate for their trust.

For further prove that this is the time to take advantage of DNMR’s prospects, technical analysis also indicates that the slaughter of DNMR’s price post-SPAC has decelerated and leveled off in the last three months, failing twice to breach a bottom resistance of around $13. Now, on its second surge since July, DNMR is currently reconsolidating around $19.88 after breaching $20 again last week. If the price can manage to break through $21, which I anticipate it will in the next couple weeks, DNMR will break free from the bear run this year and begin a bull run justified by its proven success and high growth potential.

DNMR stock chart

Source

DNMR’s most recent RSI of 50.67 has it sitting right in neutral territory. It could soon continue its momentum to break past $21. The three analysts following DNMR agree with the prospect of a coming bull run and are all long with a median price target of $34.00, a high of $54 and low of $21. Now is an excellent time to buy into the company, especially for those who plan to hang on to their shares for the next few years and capitalize on the explosive growth to come in the bioplastics industry.

Risks

As with any unprofitable company standing on expectations, an investment in DNMR still poses a few risks that are worth mentioning. PHA plastics have their advantages, but other biodegradables such as PBS and PBAT plastics are currently cheaper to produce than PHAs. PLAs remain cheaper than them all, making them the current best option for consumer products. DNMR must continue to research and drive down costs for PHAs to achieve the extent of its expected competitive advantage. If DNMR fails to drive down costs, the company will likely still see profitability and reap some benefits of the growth of the bioplastics industry, but its revenue growth will be lower than anticipated.

Additionally, investors need to understand that the foundation of DNMR's high growth expectations is the belief that consumer preferences will continue to shift towards ESG products over the next few years. This belief is grounded in two assumptions. The first is that companies will act on their stated desires to produce more sustainable products, incorporating bioplastics into the packaging of its leading products. The second is that governments will continue to pass legislation to reduce single-use plastics to meet their stated goals. Either one of these assumptions will drive the bioplastics industry if they are proven to be true. However, if one or both fails to meet investor expectations, the growth of biodegradable revenues will naturally be reduced.

Conclusion

DNMR and its parent industry still have a long road ahead. Yet even as the market has beaten down its share price, the company has met every checkpoint along that long road to success. Look at almost any large company today, and you will see proclamations of their dedication to reduce our carbon footprint and desire to turn their products “green.” Every member of the bioplastics industry stands to benefit from this shift that has only just begun. DNMR’s PHAs have unique qualities that stand apart from the rest, and the company has many relationships ready to turn into powerful customers once their research gets these bioplastics to the price and quality demanded. This day may come in months, it may come in years, but when that day comes, there will be many investors who look back to the bottom of the current sell-off and think “What if?” On that day, be one of the investors who cashes in.

This article was written by

Nicholas Calhoon profile picture
99 Followers
USMA Senior; Economics major. Risk-seeking, aggressive philosophy looking for stock/ETF opportunities to hold for the medium and long-term. I like to focus on early-stage companies operating in innovative sectors that I believe will outperform in the future as well as mature companies that are trading at discounts. My valuation techniques rely heavily on wholistic fundamental analysis to evaluate long-term potential with a hint of technical analysis to decode short-term trends. I'm very open and appreciative to any feedback on my articles on how I can improve them moving forward. As always, do your own research.

Disclosure: I/we have a beneficial long position in the shares of DNMR either through stock ownership, options, or other derivatives. 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.

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