Sorghum Bicolor photo by Matt Lavin
I posted about sorghum’s designation by the U.S. Environmental Protection Agency as an advanced fuel last December. Renewable fuel producers that use sorghum as a feedstock are obvious beneficiaries. Ceres, Inc. (CERE: Nasdaq) is an agricultural technology company, developing seeds and traits for high-energy, low-cost feedstocks – sorghum included. I expect Ceres to be on the winning end of sorghum trade as well, especially since the California Air Resources Board (CARB) has set standards for carbon intensity of transportation fuels that appear to favor sorghum over corn as a feedstock for renewable fuels.
An investment in Ceres is not for the weak of heart. As an early stage company, Ceres is spending to build a product line and forge relationships. Most recently Ceres announced progress with its drought resistance traits for rice. The company has recorded little revenue and is still reporting deep losses. By the end of the March 2013 quarter the company had accumulated $258 million in net losses. Based on the most recently reported six months, Ceres is using about $2.4 million in cash each month to support operations.
Past the market opportunity and the strength of Ceres technology, the principal concern for investors is whether Ceres has the financial staying power to reach profitability. At the end of March 2013, the company had $15.5 million in cash on its balance sheet and another $29.4 million in marketable securities. Even if there is no change in spending, Ceres could last about a year and a half without missing a bill. With regulatory changes pushing the market toward Ceres, it seems more plausible than ever that Ceres can succeed without having to raise additional capital.
Ceres is a relatively small company with a market cap of $68 million. The stock is trading near $2.50 per share under modest volumes. Insiders own about a third of the company. That might signal considerable confidence by management in Cere’s future, but it has not been enough to convince everyone. The equivalent of about 5% of the flotation has been sold short. That is only about a day and a half of trading volume, so do not expect much of a “short squeeze” in the event of some encouraging fundamental development.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.