Red Flags for Green Companies

By Maxxwell A.R. Chatsko - March 27, 2012 | Tickers: AMRS, CVX, FSLR, SZYM, TOT | 0 Comments

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Given my background as a bioprocess engineer I am obviously optimistic about the future of sustainable technologies. It is tough not to be after speaking with management at top companies such as Solazyme, Codexis, Joule Unlimited, and others. Everyone touts the market value of this chemical and that fuel, the potential of this management team and that biological patent.

That’s great, but it is important to come back to Earth and ensure we continue to make sound investment decisions. We all know that not every company will reach its goals and each has its own pitfalls and drawbacks. So, allow me to play devil’s advocate.

It's never enough to consider just one or two metrics, but here are several important pieces of financial information about each company. As you can see, when costs rise strong revenue doesn't always lead to earnings. Yet two of these companies are undervalued when compared to their peers and may make for interesting long-term plays.

Where the Sun Don't Shine

Shares of the solar giant First Solar have fallen 83% in the last year due to the perfect storm of bad news. European countries that were formerly a safe-haven for the solar industry have been phasing out subsidies. On top of that, the solar industry has been rocked by dumping accusations against Chinese companies.

A recent announcement by the U.S. Department of Commerce of lower than expected subsidy tariffs on Chinese solar products sent shares of U.S. solar companies down while their Chinese counterparts climbed. But as The Motley Fool’s Travis Hoium explains, every silver lining has a cloud.

First Solar saw earnings fall into the red in 2011 after years of steady growth fueled in part by a favorable regulatory atmosphere. Despite the tumultuous events occurring in the industry, First Solar still has the lowest costs and best ratios compared to its peers. Will opportunistic investors be rewarded down the road?

Questionable Valuation

After a successful IPO last summer Solazyme has become the darling of the sustainable chemicals industry and has recently traded at a valuation approaching $1 billion. While I am optimistic about the long-term prospects for the company’s sustainable oils platform I believe there too much downside at the current share price. The company's 2011 revenue didn't top $40 million and the accounts receivable is considerably behind competitors.

Pavel Molchanov, an analyst at Raymond James & Associates Inc., recently applauded Solazyme by saying “Their scale up is on time and on target and we’ve seen something of a relief rally”. Really? By the end of the year Solazyme will only have 20% (100,000 metric tons) of their projected 2015 commercial capacity installed – if everything goes as planned. As Amyris showed investors last month it only takes one setback to throw shares off of a cliff. Unfortunately for Solazyme, there are too many things that can go wrong between 0 metric tons of scale and 500,000 metric tons.

Although Solazyme has $244 million in cash and cash equivalents the company currently lacks any sustainable sources of revenue. That may seem like a respectable hoard for a new company, but biorefineries are very expensive to build/retrofit and maintain. That sum of money can easily go towards one new facility. In other words, the company will need to secure more funding to successfully reach its 2015 goals.

Luckily, Solazyme has partners such as Chevron (NYSE: CVX) and the US. Navy who may be willing to fund the company’s growth. The U.S. Navy may increase funding in order to secure sustainable fuels for their Green Strike Group. Just don’t be surprised if Solazyme has a secondary offering to take advantage of its nearly 4:1 price to book valuation.

The Rumor Mill

In early February Amyris announced that they would push back production targets by one year to 2015. Word quickly spread that Amyris was “giving up making advanced biofuels” with some articles even referencing the company’s conference call. If you were to listen to the conference call however, CEO John Melo never mentions ditching fuels. I have no idea how or why the company’s pursuit of a consistent process out of their pilot facilities can get misconstrued as a walking away from fuels altogether. The company will simply focus on specialty chemicals while their joint ventures build scale for fuels.

Is this misunderstanding keeping shares down?

Probably not. The company was able to secure financing from partners such as Total SA. (NYSE: TOT) to shore-up their engineering knowledge base. The financing will lead to future share dilution, but should Amyris successfully build-out their commercial capacity with their partners I believe investors won’t feel much pain. In 2011 Amyris sold $155.6 million of products, which include diesel and ethanol fuels being sold in Brazil. At the current valuation of $296 million that is a relatively underappreciated accounts receivable.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.

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