The Small-Cap Stars system is meant to identify those fundamentally strong small-cap companies that are poised to grow, and in few cases has it been as successful as Green Plains Inc. (GPRE) , the nation’s fourth-largest producer of ethanol. The company has had a 2014 to remember, more than doubling in value since the start of January.
The company success has been pretty simple: it’s making money. Consistently enough to offer a dividend. On the whole, Green Plains is currently on the rise and has every chance of continuing to do so.
Corn Prices on Lengthy Decline
Like most materials stocks, Green Plains success is largely tied up in the price of its basic materials. In the case of ethanol, that’s corn. And a look at corn prices over the last three years should make it pretty clear what lies at the heart of the current run for this stock.
Since peaking in mid-2012 at over $8 a bushel, corn has plummeted. The price is now under $3.70 a bushel, and the grain hit a four-year low earlier this year. Corn and soy beans are both seeing prices plummet as a particularly rainy summer in Iowa and the center of the American continent has farmer’s producing record yields.
Cheap Corn is Good News for Ethanol Makers
Green Plains certainly isn’t treading water through these incredibly good market conditions (for ethanol makers, that is, as corn farmers might have a distinctly different perspective on this). The company is making hay while the sun shines, to mix metaphors, as earnings are up almost 200% this year and over 30% over the last five.
And estimates for the company’s earnings, now and in the near future, are also rising quickly. Earnings are projected to rise by over 200% this year, and 232% in the current quarter. All this is getting returned to Green Plains investors, as the company announced a $100 million share buyback and a doubling of its cash dividend to $0.08 a share on August 14.
Analysts, too, have been taking notice. Piper Jaffray’s raised its price target on the stock from $36 to $45 on July 14 while Imperial Capital reiterated an outperform on July 29 and paired it with an increase in its price target from $35 to $50.
Luck Favors the Well Prepared
One certainly can’t expect corn prices to remain in the basement forever, nor can one really insist that all of the current jump in profits is due to the good work of the people at Green Plains alone. Commodities prices are a fickle bunch, and just as assuredly as Green Plains is getting some great luck with the weather this summer, the company’s certainly going to go through its fair share of high-price environments for corn as well.
However, simply chalking Green Plains success in 2014 up to good luck in the corn markets would be short-sighted. Anticipating commodities prices is not a part of the Small-Cap Stars system, but identifying companies that are well-run is.
Green Plains triggered the Small-Cap Stars screen for its low ratio of enterprise value to sales and its low levels of three-year regression beta. And the company’s exploding stock price is a sign that the system’s worked. A simple comparison of the primary Corn ETF, the Teucrium Corn Fund (CORN) , and Green Plains’ stock should make it clear that there’s more at play than just corn prices, too. While the correlation between the two is clear, Green Plains’ skyrocketing price since the start of the year appears to leave slumping corn prices behind.
Things get even clearer when you look at a DuPont report for Green Plains. While the company’s ROE is well below the industry average, something that’s typically not a good sign, but the company’s net margin compares very favorably with its competition within the industry.
Corn prices may be unstable and hard to predict in the long term, but a company with a strong fundamental underpinning is one that should be ready to ride the ups and down of the commodities markets while remaining strong. And Green Plains might just be such a company.