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.
