TPS Trade Alert – August 14, 2013
August 14, 2013
Recommendation:
Buy Ceres (NASDAQ: CERE) up to $1.80 per share.
Trade Rationale:
In the short to medium-term, natural gas is the most likely candidate to replace gasoline as our main fuel source. After all, it’s a lot cheaper, cleaner, and more domestically abundant than oil.
However, natural gas doesn’t solve our long-term fuel issues. It too will eventually run dry. So where will we turn to for our fuel needs?
One distinct possibility is biofuel.
Biofuel is simply fuel produced from living organisms such as plants or algae. The obvious benefit to biofuel is it’s completely renewable. Basically, whatever the feedstock is, we’ll just keep growing it. Biofuel should also typically be cheaper than fossil-based fuels, particularly oil.
The most common and well known biofuel is ethanol. In the US, corn-based ethanol is already used as a common ingredient in gasoline.
Unfortunately, currently produced ethanol has its share of issues. In a nutshell, producing ethanol is not energy efficient overall and it tends to raise food prices.
But that’s where Ceres (NASDAQ: CERE) comes in.
CERE is an agricultural biotech company which develops energy crops to produce renewable biofuel feedstock. Essentially, the company uses a combination of advanced plant breeding and biotechnology to produce energy crops. These new crops have traits addressing the limitations of first-generation biofuel feedstock.
The company’s primary energy crop is a proprietary sweet sorghum hybrid (a type of corn). The sorghum designed and sold by CERE is the company’s first large-scale commercial crop.
Currently, the company’s focus is on Brazil. Ethanol from sugarcane is a huge industry in Brazil and CERE’s sorghum can be used to extend the operating season of the country’s mills.
There are several benefits to CERE’s business model.
First off, the company operates upstream of the commodities market. So, it doesn’t have to deal with the volatility commonplace when investing in commodities.
Moreover, the company’s focus is on selling its crops in the form of seeds. This is important because seeds have low capital requirements to produce and are protected by intellectual property rights.
Finally, the nature of CERE’s business means the company should have sustainable, high margins. That’s clearly a good feature from a long-term business viability standpoint.
In terms of financials, the company is really just getting off the ground (so to speak).
While CERE did have $1.4 million in revenues in the most recent quarter (up from $1.1 million in the year prior), the company is still losing a fair amount of money per quarter.
That’s okay for now. For one, the company is still in the product trial stage and is ramping up business activity in Brazil. In fact, Brazilian mills are reporting 50% higher sorghum yields year-over-year due to CERE products. And, Ceres sorghum is outperforming competitors.
What’s more, the company has $37 million in cash and almost no debt. Plus, current assets are 8x current liabilities. In other words, the company has no concerns over running out of money anytime soon.
Here’s an interesting point…
The company’s $37 million in cash works out to $1.50 per share. With the current stock price at $1.62, it means investors believe the company’s future business is worth just $0.12 a share, or roughly $3 million total.
Considering how successful CERE’s sorghum has been for Brazilian mills, it’s an absurdly low valuation. Not to mention, the company’s products could utterly change the biofuel landscape – or possibly the entire fuel industry.
Given the health of the company and the excellent prospects of CERE’s products, we believe now’s the time to grab shares in the company. Get in at the ground floor of this incredible biofuel opportunity.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Ceres |
| Ticker: | CERE |
| Recent Price: | $1.62 |
| Market Cap: | $40.4 million |
| Avg. Daily Volume: | 634,211 shares |
Chart:
Category: TPS Trade Alert
