GPRE - Blue Skies and GREEN PLAINS

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Green Plains is one of the largest ethanol producers in the US producing almost a billion gallons per year with ethanol production revenue accounting for almost 75% of their total revenue. For those unaware, ethanol is a corn based alcohol that is primarily blended at a 10% ratio into gasoline and is found in almost every blend per federal mandate.

They just got wrecked by Q3 earnings vs Analyst expectations. Due to the corn inverse in July and August, the entire industry had been paying between [100-150c above the Chicago corn](geo:0,0?q=100-150c above the Chicago corn) price in basis throughout most of Q3 (equates to -.55c of ethanol margin contribution on the high end using 2.9 gallons per bushel of corn) that the analyst community did not seem to realize. Spot margins mostly ended up being negative on a $/gal basis for July and August once you include corn price, so you get ugly as sin earnings report and the stock has corrected 15%.

Now consensus analysts expect $.25c EPS for Q4 (roughly 15 mil earnings) With that said, GPRE per their 10Q is looking to produce roughly 240 MMGal in Q4 and October spot margins were about $.70/gal and halfway through Nov we’ve averaged $1.30 of board crush margin. I easily think we could average over $1 for the entire quarter and with 240 mil gallons would give us well over $250 mil EBITDA (it does depend on how much margin they’ve hedged though) given corn is mostly at a discount to the CBOT corn price across the country.

Ethanol Chicago Platts Argo Swap is the primary trading instrument for ethanol and is a full-month average financially settled swap if you’re interested in checking it out. The commodity is going parabolic currently while corn stays flatish.

Combine that with an 18% short interest on a low volume stock that equates to ~10 days to cover on the short interest (surprisingly close to Avis and GameStop in terms of days to cover), my gut feeling is that they show a $2 to $5ish EPS (depends on non-spot margin parts of the business and hedging) vs current consensus analyst expectations of $.25 which could start making the stock parabolic after Q4 earnings as bears get routed, similar to Avis.

Position: long 3/17/22 $60 calls vs $39.50 underlying.

It is small cap but should fit in the market cap rules. We like the stock! (Unbelievable cash flow yield from the way it appears by the way)

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Any idea how the infrastructure bill will affect this company?

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This is a super interesting read, thank you for sharing! Admittedly I have 0 idea about this space - are you saying the price of the stock hasn’t followed the price/gal that’s showing in the market?

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Great write up!

I stumbled on GPRE 15 years ago trying to find a different ticker and wish I bought then! Looking into this, won’t fool me twice…

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I don’t know much about the corn market, would love to have some more details regarding the inverse you mentioned.

I used an ethanol crush calculator based on the USDA current commodity prices for Nebraska (where GPRE is located) and came up with roughly $1.47 crush price.

Crush margin in August was around $0.43.

GPRE’s consolidated crush margin was $0.01. Does this mean that, assuming the August price was roughly average for the quarter, $0.42/gallon was costs? I’m a bit confused here.

So basically analysts are anticipating 15 million revenue, and GPRE is anticipating 240 million gallons produced. Last quarter GPRE sold 181.2 million gallons, 75% of capacity, so they produced 241.6 million gallons last quarter. This means that if they sell 75% again then they’ll have sold the same amount. Except now the market crush price is 3.4x what it was last quarter.

Also, corn prices are down from last quarter while ethanol prices stayed the same but natural gas prices increased. So basically, costs are lower (cheaper corn) and sales will be up (higher gas prices). Am I interpreting this correctly?

They also reported ethanol production loss of $0.1/gallon after depreciation and amortization. This means costs per gallon were $0.53 assuming the August crush number was roughly the average for the quarter. So now when crush prices have increased by over $1, so we could see profit of $0.5/gallon if costs stay the same and sales are still 75% of production?

From my understanding, this would lead to earnings of like $90 million just from ethanol production, as opposed to the 15 million anticipated. And yeah this doesn’t include sales of DDGS, corn oil, etc.

But that would only be a 6x increase in EPS right, so analysts expecting 0.25 would actually see $1.5 or I guess $2 since ethanol makes up 75% of sales as you said and assuming the other segments grow at the same rate.

$2 compared to $0.25 is massive but where are you seeing the potential for $5?

Also please correct my numbers, math, and info. I know nothing about corn other than that it tastes great.

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@I_have_all_898_Pokem

Let me know what you think about my other message, but I also checked and saw that the expected PE for Green Plains in 2022 is 45 (which at a $2 eps would be a significant boost to current price). However, all competitors have PE ratios around 15. So based on that, an EPS of $2 would mean the company is currently well overvalued and doesn’t have any upside potential… Let me know what you think.

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Hey Tedro, this is an interesting question. Ethanol was added to gasoline in the 1990s as a part of the Clean Air Act so it was founded on the idea of “this is good for the environment” but I am unsure if this will be the focus over EV’s moving forward. I don’t see anything specific but maybe under the $21b allocated to “environmental remediation”? I’m grasping at straws here.