Elliot Gue writes us a nice teaser ad for his Energy Strategist service in the Friday wrapup from Rukeyser.com … if you want to find out what the cellulosic ethanol play is, the one that he says is essentially a state sponsored company, all you need to do is cough up $499 a year.
Or, if you prefer, read a few more paragraphs … and the Gumshoe will share the name of the company with you, sans subscription.
Now, his subscription claims to provide you with access to “an Exclusive Club of Super-Investors” — and while the Gumshoe might modestly claim the same about our free site here and our nascent forum, I can’t promise you that I’ll give you any of the special free reports and add-on subscriptions that Gue’s offering. Or that I myself am a super-investor.
So what is Gue selling here?
“State securities” — this is what he calls companies that are essentially favored by the government, either with friendly legislation or government contracts.
And he puts cellulosic ethanol, also called Cellanol, in this category — you may have heard of this referred to as biomass ethanol, or switchgrass ethanol, essentially what we’re talking about is the process of taking organic waste, basically piles of hay and wood chips, separating out the starches, creating sugars, and turning that sugar into ethanol. It’s a LOT less efficient, right now, than either corn or sugarcane ethanol, both of which have plenty of efficiency issues of their own.
But, switchgrass is certainly easy to grow and corn stalks are abundant, and it is possible to turn it into fuel, and it doesn’t interfere with other needs … like feeding people, which is somewhat more difficult when ethanol demand triples the price of corn.
So, the argument goes, if we can find a way to make it more efficient, wouldn’t cellulosic ethanol essentially be guilt-free fuel?
I can’t answer that … but I can tell you that Gue has chosen what he believes is the key cellulosic ethanol company. And he notes that Congress and President Bush are generally in love with this fuel — if anyone loves a free lunch more than the rest of us, it’s politicians … and they apparently smell a way to reduce oil imports, feed people, and avoid drilling under caribou hooves, all at the same time.
Which is why he calls this a State Security — low risk, because of massive federal investment. He compares it to musket makers in the revolutionary war, Cree with their federal R&D support for LED technology, and Celera for their involvement with the Human Genome Project.
Gue calls it the “Iron Triangle” that guarantees success — Bush’s enthusiasm for cellanol, the Supreme Court backing the EPA’s enforcement power, and corporate America smelling ethanol profits and pushing for advancement.
He also does some name dropping, noting that Bill Gates, Vinod Khosla, and Richard Branson are all ethanol investors.
I think I’ve heard the phrase, “no such thing as a free lunch.” Whether that axiom holds true with cellulosic ethanol is outside my sphere of knowledge, but I digress.
He gives a few specific clues as to the specific company that is “about to break out”:
“The company already controls over 50% of the market share and no one has ever heard of them! But our government has… President Bush visited their research laboratory back in February and the Department of Energy is collaborating with them on various projects.”
That’s it … that’s all we get for clues.
Thankfully, the Gumshoe is on the case — and my recently refurbished UltraThinkotron 4600 is well oiled and ready for action.
So we throw all that data in, discarding the pages of hype about the revolutionary war and human genome project and government funding boondoggles … and we’re left with …
Novozymes North America,which is owned by the Danish company Novozymes A/S (NZYM in Copenhagen, sponsored ADR at NVZMY.PK and unsponsored ADR at NVZMF.PK). The ADRs don’t necessarily even trade every day, though it looks like one or the other has a bit of action most of the time. Past ADR trades seem to be at pretty fair prices, not much premium, though there’s no guarantee of that. At the close in Copenhagen on May 31 it was at 594 Kroner, which translates to $106.84 at the current exchange rate.
President Bush was at their R&D lab back in February to push his “20 in 10” initiative for cutting oil consumption by 20 percent in ten years, with a key focus on cellulosic ethanol as the way we can do that. This was covered by a lot of sources, but one interesting one was Ethanol Producer Magazine — there’s also an official White House press release about it, including a photo of Bush at the plant. And a funny and cautionary article about it from Salon, if you want to go that far.
And Novozymes does have some DOE contracts — including, most recently, participation in an Emmetsburg, Iowa, project that will “produce 125 million gallons of ethanol per year, of which roughly 25 percent will be cellulosic ethanol. For feedstock in the production of cellulosic ethanol, the plant expects to use 842 tons per day of corn fiber, cobs, and stalks.” (from the DOE contract announcement)
If you’re curious about cellulosic ethanol and the role of enzymes, the company has a pretty interesting and fairly honest-sounding FAQ page on this (they mostly call it biomass ethanol, but it’s the same thing).
Now, the tricky part — Novozymes is actually a big Danish company that focuses on a lot more than ethanol. They make the enzymes that many believe will make cellulosic ethanol more efficient to produce, but they also make enzymes for all kinds of other industrial and biotechnology uses. They do have a new office in D.C. as of this week, as well as that R&D lab that the President visited, but they also work worldwide. It’s a little difficult to get a handle on their business. Their annual report, which is very informative but a big PDF file, is here for 2006. Their technical enzymes division, which is about 30% of their business, is where ethanol lies … so we can assume ethanol alone is likely less than a quarter of their business, though it’s also by far the fastest growing part. Their self-reported market share in this business line is 50-55%, which matches Gue’s tease info, too.
They do have a lot of patents, for all kinds of enzymes and microorganisms and techniques, and are a leader in scientific intellectual property in Denmark (which I believe is third in the world in patent filings, after the US and Japan). They recently won a patent lawsuit against a US competitor in the ethanol enzymes business, but I don’t really know how strong their patents are in general. You can quickly get overwhelmed by going over their multitude of businesses, from beer brewing enzymes to wound dressing to ethanol processing, just to give you a taste.
The shares have had a good Spring — they’re up about 20% since the end of March, and appear to trade at a PE in the high 30s based on trailing earnings, though it looks like the yield is a decent 4.5% according to Dow Jones. Net income growth has ranged from 5-10% or so in the last several years. It’s a pretty big company, the market cap is around 36 billion Danish Kroner, which translates to about $6.5 billion stateside.
So … maybe a dominant player in ethanol enzymes? I don’t know. They’ve certainly got some impressive sounding science and a huge array of products, and there is certainly — at least for now — a nice government tailwind for these businesses. Shares on the pink sheets will run you a bit over a hundred bucks most likely, and it’s a big, growing company that has performed well of late, so it’s not quite the same as plunking down your money on a 50 cent ethanol microcap … this sounds better than that to me, though I don’t know if I’m interested in figuring this company out enough to invest … and it may trade at very low volume on the pinks. I’d love to hear two cents from anyone that has looked at this company or invested in ethanol plays before, so feel free to let ‘er rip with comments here or on the forum.
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