Green Plains, Green Profits

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by Debra Fiakas CFA

Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) is one of the few U.S. ethanol producers to turn a consistent profit.  The company is half way through its fifth consecutive profitable year.  Sales in the most recently reported twelve months totaled $3.4 billion, on which the company earned $40.5 million in net income.  During this period Green Plains generated $100.0 million in operating cash flow.

Tracing Green Plains profits requires a bit of effort by investors.  The company channels its products through a marketing and distribution division.  Thus while, ethanol production represents about one-third of total revenue, it has reported significant operating losses.  Production losses are offset by profits in each of the other segments.  Corn oil production and agribusiness products such as distiller grains provide the majority of profits.

Green Plains operates nine ethanol plants with a total production capacity of 740 million gallons per year.  At a capacity the ethanol process Green Plains uses can generate up to 150 million pounds of corn oil and 2.1 million tons of distillers grains.  The company has built up through a combination of new construction and acquisitions.  We expect more of the same in the coming years. 

Green Plains has plenty of cash in the bank, especially after closing debt offering of $120 million last month.  We estimate Green Plains now has $320 million in cash on its balance sheet.  Some of that cash may be used to pay down higher coupon debt.  The new debt carries an interest burden of 3.12% compared to a coupon of 5.75% on the existing convertible senior notes.  Green Plains has a total of $518 million in debt, representing about 51% of the company’s total capital.

Even if some of the funds are diverted to debt pay-off, we expect management to look more seriously at investments for growth.  One of the company’s more interesting ventures is BioProcess Algae, which is developing technologies for growing and harvesting algal biomass.  Of course, additional ethanol production capacity and grain storage capacity are also on management’s wish list.

At the current price level GPRE is priced at 11.8 times forward earnings  –  no significant bargain compared to the trailing price earnings multiple of 12.5.  However, compared to the broader specialty chemical sector, GPRE is trading well below the average.

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.


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