What do you think of when you see words like grains, cattle, or biomass appear together? Anyone with a basic grasp of chemistry will know where I’m going—Ethanol. Ethanol is an energy source that’s been on the rise for decades, with ethanol production increasing by approximately 10 percent annually to 13.3 billion gallons since the 1980s.
The fourth-largest ethanol maker in the U.S., Green Plains, Inc. (GPRE) , recently became the first major ethanol company to buy its own cattle-feed yard. Green Plains announced on June 10, 2014 that it had acquired the assets of Supreme Cattle Feeders from Agri Beef Co. The deal included a feed yard and a grain storage facility near Kismet, Kan., for $15 million.
The move marks a shift for the Omaha, Neb.-based company from selling distillers grain, a byproduct of ethanol production known as Dried Distillers Grains with Solubles (DDGS), to taking the vertical integration bull by the horns, so to speak, and raising their own cattle.
“As some of the customers transition out, we’ll definitely transition into feeding our own cattle in the future,” said CEO Todd Becker. “It just happens to be that, instead of an ethanol plant grinding the corn, now the cow will be our corn-processing unit.”
Cheap Corn Benefits Green Plains
Green Plains is a commodity-processing business with operations related to ethanol production, corn oil production, grain handling and storage, and commodity marketing and distribution services. The company processes over ten million tons of corn annually, producing over one billion gallons of ethanol, three million tons of livestock feed, and 250 million pounds of industrial grade corn oil at full capacity.
The reasons driving the strong ethanol market are multifold, but one factor is certain: the low-price of materials. One bushel of corn, with a cost currently sitting at around $4.75, will produce 2.8 gallons of ethanol and 17 lbs. of DDGS. With ethanol trading at about $2.15 per gallon, that’s $6.02 worth for each bushel.
Another factor relates to government policy. In order to reduce the U.S.’s dependence on foreign oil, the federal and state governments have encouraged the use of domestically produced alternative fuels. In October 2010 and January 2011, the U.S. Environmental Protection Agency (EPA) approved the use of up to 15 percent ethanol blended with gasoline (E15) for cars and light trucks. Over 129 million vehicles, or 60 percent of the passenger vehicles in services are eligible to use E15, which has increased the demand for ethanol.
Other major players such as BioFuel Energy Corp. (BIOF) , Pacific Ethanol, Inc. (PEIX) , andREX American Resources Corp. (REX) , have seen their stocks increasing in recent quarters. All told, the renewable market appears, at the moment, to have a bright future.
Impressive Fundamentals Could Indicate Future Success
The acquisition of Supreme Cattle Feeders is another in a sequences of major actions for Green Plains.
During 2013, Green Plains completed the construction of 9.4 million bushels of grain storage capacity at six ethanol plants and three grain elevator locations. The expansion projects were completed at a total cost of $6.0 million and bring the company’s total grain storage capacity to 30.8 million bushels.
Then, in August 2013, Green Plains announced that its Board of Directors approved the initiation of a quarterly cash dividend. An initial dividend of $0.04 per common share was paid in September 2013, and Green Plains ultimately paid $2.4 million in dividends to its shareholders for the year.
According to the company’s financial reports for fiscal 2013, Green Plains had a net income of $43.4 million, or $1.26 per diluted share, comparing to $11.8 million, or $0.39 per diluted share one year earlier. As North America’s fourth largest ethanol producer, Green Plains markets and distributes over one billion gallons of ethanol annually.
“Margins for the ethanol industry expanded during the fourth quarter of 2013 and have remained strong in the near term. Ethanol and distillers grains prices reflect robust demand and tight supplies both domestically and internationally,” said CEO Todd Becker in a statement.
During the first quarter of 2014, Green Plains has kept the growing tendency. According to the company’s financial results, net income for the quarter was $43.2 million, or$1.04 per diluted share, compared to $2.6 million, or $0.08 per diluted share one year earlier.
Equities.com’s EVA Reports shows that the company’s net income growth rate is 268.34 percent in fiscal 2013. However, despite this rapid growth, the stock appears to continue trading at a relative discount. The stock’s price-to-earnings ratio of 26.84 and price-to-book value ratio is 2.14 are solid if not eye-popping, but the price-to-sales ratio of 0.38 could indicate that shares of Green Plains are currently offering a steep discount on the company’s growing revenues.