Gevo (NASDAQ:GEVO), the Colorado-based renewable jet fuel producer, has $530.6 million in cash, but its market cap is now about $1.048 billion. This means cash is now 50% of its market value or $2.66 per share. Wait for GEVO stock to drop closer to the cash per share, despite the value of its much-touted patents.
On page 20 of the company’s March presentation GEVO indicates that, after its recent cash raises, there was $530.6 million in cash as of Feb. 26, with “no material debt outstanding.” In addition, the company said it had about 198 million shares outstanding.
In my last article on Feb. 17, I suggested that GEVO stock was worth no more than $5.70 when it was trading at $12.17. But I am not sure about this anymore. I need to see what earnings in the first quarter look like, as well as the apparent cash burn. These will be released on May 13.
Cash, Cash Flow, and Valuation
On page 5 of the presentation, Gevo indicates that it has 595 patents and applications, including patents from Butamax Advanced Biofuels (Butamax is a 50/50 JV between Dupont (NYSE:DD) and BP (NYSE:BP). Gevo and Butamax ended years-long litigation in 2015 and agreed to cross-license their patents, paying royalties when either uses the other’s patent technology.
But here is the problem. We don’t really know how much the IP is worth. The company indicates on page 5 that the patents are worth $400 million. This is from a valuation from a company with the name Peak Value IP, likely paid by Gevo.
Even if the technology is worth $400 million, it puts the stock’s value at no more than $931 million, or 12% lower than today’s price. That puts its value at $4.71 per share.
But it still leaves GEVO stock on a huge multiple of revenue and earnings. For example, analysts forecast that it will make just $2.21 million this year and $2.37 million next year. This means, that after the cash is deducted, Gevo still trades for 234 times this year’s sales and 219 times 2022 sales.
That is despite all the potential growth that the company talks about in its presentation. For example, on page 11, the company says it has $1.5 billion “take or pay” renewable fuel contracts in place. In addition, it is in discussions for an additional $6 billion in contracts.
So far, nothing has been announced. I believe this includes the recent Feb. 2021 contract with Scandinavian Airlines contract for 5 million gallons per year starting in 2024. This was discussed on page 42 of the recent 10-K 2020 annual report.
I am inclined therefore to believe analysts’ projections unless something in the earnings release changes this outlook.
What To Do With GEVO Stock
This means that GEVO stock is too expensive right now, despite the company’s apparent talk of multi-billion contacts. The take or pay feature is nice as it guarantees a minimum payment. But the problem is the contract might have a low minimum payment. That appears to be what analysts think the existing take or pay contracts add up to right now.
Without more definitive information along these lines, it is hard to value the contracts or the potential sales. Therefore, the stock will likely float down to a more reasonable level.
For example, even at 50 times sales, or $118.5 million (i.e., 50 x $2.37 million), the market valuation would be $649.1 million. That includes the $530.6 million in cash and no debt. Based on 198 million shares outstanding, that puts the GEVO stock value at $3.28 per share.
This represents a potential drop of $2 in the stock which amounts to a 37.7% decline. This is a sort of dire analysis. The company has plenty of hidden assets with its patents. It has lots of goodwill with customers that want to use renewable fuel.
The problem is solely with the company’s valuation. Let’s hope that the upcoming earnings release provides more detail on its sales outlook and potential contracts. Otherwise, GEVO stock is likely to keep falling.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.