Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: Green Plains Inc. (GRPE) by: Christopher Barry. "The Greener Grass For Green Plains"


Green Plains Inc. (GPRE, $18.25): “The Greener Grass for Green Plains”

By: Christopher Barry, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by me, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

·         Green Plains Inc. (NYSE: GPRE) produces fuel-grade ethanol and corn oil, as well as providing grain handling and storage, cattle feedlots, food ingredients, and commodity marketing and logistics services.

·         They have a business strategy that includes betting on the increase in ethanol demand, organic and inorganic growth.

·         The earnings are inconsistent in regard to expectations; they have exceeded expectations twice and missed twice.

·         GPRE is 50 cents away from tying their 52 week high.

Key Points: They operate in four main segments: ethanol production, agribusiness and energy services, food and ingredients, and partnership. In the letter to the investors, Todd Becker, CEO, discussed his belief that the world is short on protein and GPRE could use their expertise in food processing to become a leading provider of protein. In the 2017 10-K the management discusses the continued emphasis on all segments in the company, announcing a joint venture contract with Delek Logistics Partners.

GPRE’s plan of diversifying their revenue stream helps reduce commodity pricing risk. The strategy of investing in different sectors gives the company more opportunities to find ways to increase profit. Another way that management manages risk is through the use of various hedging strategies which can yield a variety of results.

Their main business operation is the production of ethanol; this production has increased in each of the last two years, and overall US exports are up 31% on the year. Their business strategy includes the belief that ethanol demand will continue to climb as a result of environmental regulation with regard to concerns about clean air and the pollution that oil generates. They reduce costs by placing corn and grain storage near ethanol production sites. This strategy allows GPRE to develop relationships with local corn farmers, and these farmers produce around two-thirds of the corn volume. Management discussed the plan to grow organically by focusing on core strengths i

n order to find ways to further drive down costs. The last part of their business strategy is to grow through strategic acquisitions; management has a history of being patient enough to find the acquisitions that fit the existing business structure.

What has the stock done lately?

During the fourth quarter last year, the joint venture intermodal export and import fuel terminals were completed, which included a storage capacity of 550,000 barrels for ethanol. GPRE has been a model of inconsistency in terms of meeting expected earnings. GPRE began and ended 2017 by exceeding earnings but missed them in the second and third quarters. The most notable performance came in the second quarter of 2017, with expected earnings of -10 cents compared to actual earnings of -40 cents.

Past Year Performance: The stock has been volatile, with a downward trend since the beginning of 2017. Management’s outlook remains positive and they appear to have put together a business strategy that is diversified and will help increase profits.


Source: FactSet

My Takeaway

GPRE’s management team understands the risks that accompany having profits so closely linked to commodity prices. Their strategies of investing in different business segments, coupled with their hedging strategies, appear to be the best way to manage risk. This approach appears to be a long play, and as the demand for ethanol increases, GPRE will stand to gain great benefits.

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