“The New Industrial Super-Material that Could Replace Plastic and Steel” (Eric Roseman)

By Travis Johnson, Stock Gumshoe, February 16, 2010

I haven’t written about any of the teaser ads from Eric Roseman of The Sovereign Society for a couple months, but this one caught my eye — and, clearly, the eyes of a great number of my readers (who are, in case I haven’t reminded you lately, the smartest, best-lookin’ and most insightful folks in cyberspace).

And this time it’s a little different: Roseman usually focuses on commodities, at least in the stuff of his that I’ve covered in the past, from overhyped teasers about the “secret” government silver program, to the special Canadian coins that could supposedly help you bypass US Government gold confiscation programs and buy gold at a $600/ounce discount. Today, however, though he’s still pitching his commodities-focused newsletter, we’re looking at an actual stock, a company that really makes something … though it is, of course, no less “top secret,” “amazing,” or “revolutionary.” Here’s how he entices our reptilian brains:

“Recently 380 scientists from 27 countries around the world met in Berlin to discuss a technological breakthrough that’s been 24 years in the making… It’s being hailed as:

“The New Industrial Super-Material that Could Replace Plastic and Steel”

This Revolutionary Material promises to…

“Slash our dependence on Middle Eastern oil…
“Conquer industrial, commercial and retail markets around the world and…
“Catapult the MIT offspring company that developed it from zero to the leader in a market expected to reach $480 billion – virtually overnight!
“Business Week is calling this new industry: ‘The largest economic opportunity of the 21st century.’”

And he goes on to imply that this is practically the second coming of DuPont, or of Rio Tinto, or US Steel … a company that will become a titan of a new mega-industry … or, in his words:

“A chance to get in on the ground floor of a little-known company aiming to take its place among these industrial giants. With a product so revolutionary, the World Economic Forum has added it to its coveted list of ‘firms most likely to transform the way business and society operate.’”

So what the heck is he talking about?

Well, if you subscribe to his Commodity Trend Alert newsletter, he’ll tell you — it’ll only cost you $800. Or if you prefer, I’m sure I can identify this stock for you for a price that’s a bit more, well, free-ish … just read on as we sort through the clues …

The special material that we’re being teased about is some kind of bioplastic, Roseman says that the firm has “perfected a ‘next generation’ injection moldable bioplastic that’s tough, durable and heat resistant. And not only that, it’s biodegradable! A viable replacement for all products using polycarbonates.”

So that’s obviously a huge market — polycarbonate plastic is in practically everything. What clues do we get about which specific company it is?

Well, first we get some supporting quotes from respected news sources, just to help us trust the pitch a bit more:

“Market Watch [sic] recently told investors: ‘This is not just an R&D lab experiment…you can play this one with confidence.’

“Not only that, they predicted that this company could be ‘leaders on the ground-floor of an entirely new industry.’ And that their ‘market-disruptive technology…’ has ‘tremendous upside potential.’

“And Forbe’s [sic] believes it could be ‘the next Google.’”

More clues? Of course:

Target used this plastic to produce biodegradable gift cards.

And then we get into a few paragraphs about the discovery of this “substance” and history of the company … here are some excerpts, with a few clues hidden in the chatter …

“The actual substance was discovered 24 years ago by two scientists in a research lab at MIT – one of the most prestigious scientific institutions in the world.

“They were carrying out studies on plant life when they discovered an enzyme that allowed bacteria to produce a natural form of polyester! (Yep, the same material we were all wearing back in the 70s.)

“Plants use this process as a means to store energy. But these 2 geniuses at MIT saw another application in it. A way to create a durable, flexible, organic substance for industrial use!

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“One that could be:

“Manufactured to specifications far beyond industry norms today.
“Made more flexible and versatile than plastic.
“Tempered to be even stronger than steel.
“Flame-resistant and freeze-tolerant.
“Produced without harming the environment.
“The driving force of change of an entire industry as we know it today…

“They took their discovery, patented it and bought it from MIT. Then they set out to build a better mousetrap. A commercially viable bioplastic.

“To do that, there first would be some important hurdles to clear.

“They’d need to be able to make sure it was a suitable substitute for plastic used in products today.
“They’d need a means to mass-produce it cheaply and efficiently.
“They’d need to be able to stir up interest in and demand for it.
“Twenty-four years later they’ve done it all. And their timing couldn’t be better….

“For years the process of manufacturing it was costly. And often tied to the prices of the commodities used in its production.

“But now that’s about to change. I won’t bore you with all the technical details here, but the bottom line is with their latest advancements this company has cut production costs from around $1.15 a pound by over half!

“They’re now able to produce their bioplastic on a commercial scale at less than 50 cents a pound. And that makes them competitive with the traditional petrochemical industry for many applications.”

OK, so there’s more — this one has a deluge of clues, in part because they have to explain a product that most of us haven’t heard of and convince you that it’s going to be a huge market, but that’s enough info for me to name the stock for you. Roseman says that by 2025 BioPlastics could be a $480 billion industry, taking aim at the $1.6 trillion global plastics business even as it helps reduce the demand for oil and reduce pollution, among other things.

So who is it? We throw that big ‘ol pile of clues into the mighty, mighty Thinkolator … and out the other end comes one word: Metabolix

Yes, that’s our answer — Metabolix (MBLX)

If you’d like to read that Marketwatch article that Roseman cites, you can find it here — though “recent” is a relative term, the article is about 2-1/2 years old. Certainly the stock looks a little bit more appealing now than it did back in early 2007, when it went public around $15 and eventually shot up to near $30 … the shares are now right around $10, and the company is projected to only lose about half as much money this year as it lost last year, so that’s something.

Metabolix certainly had a well-timed IPO — they had by far their biggest ever year in terms of revenues in 2006, shortly before they went public, and since then have never had sales of even half as much as they reached in that year, though with sales of just $4 million in 2006 and significantly less than $2 million annually in the years since it’s clear that this firm is not being valued based on their actual business: This is a bet on the future.

And analysts seem to agree with Roseman that 2010 is a pivotal year — they’re forecasting sales of $14 million this year (that’s an average, and the range is wide — the low guess is $6.6 million and the high guess $22 million), though that’s still not nearly enough to make them profitable, the estimate is still that they’ll lose something in the neighborhood of 78 cents per share in 2010. They still have $70 million in net cash on the books and no debt, so they could conceivably get through a couple more years like 2008 and 2009 (lost roughly $35 million per year, pending final 2009 numbers) without going broke or raising more money, but investors would no doubt be cheered about a big spike in revenues finally coming this year.

As might be expected for a newly public company, the insiders are still in selling mode — they still own more than a third of the firm, but have been selling, mostly through automatic programs, over the past year … no insider purchases since 2008. That doesn’t necessarily mean anything, if I had my money tied up one company I’d sell some too, but it’s always worth checking and there certainly hasn’t been the pattern of insider buying that can indicate that the C-suite folks see their shares as a bargain.

This stock is an irresistible one to tease, of course — everyone who’s seen The Graduate is dying to use the “Plastics” line (“just one word,” Benjamin Braddock is advised in 1967). And of course, every newsletter is trying to seduce us. And they’ve done so before with this same company — I thought it sounded familiar, and it turns out that I did indeed write about another Metabolix teaser about 18 months ago, so if you’re curious (or just can’t get enough of your friendly neighborhood Gumshoe) you can see that one here.

We can’t judge Metabolix based on their earnings, of course, since they don’t have any … and, if their projections and the analysts are to be believed, we’re at just the beginning of a big parabolic swing up in revenues — but if you want to get some idea of how the company will have to grow into their valuation we can consider other plastics companies. There aren’t that many pure plays, but some possible considerations are PolyOne (POL), which develops specialty thermoplastics and polymers, has about the same projected five-year growth rate as Metabolix (12%ish, though those guesses are rarely very reliable) and trades at .34X sales (and a PE of 10, if you’re curious); A. Shulman (SHLM), also primarily an industrial high-tech plastics firm, is similarly valued at about .5X sales; DuPont (DD) is no longer primarily a plastics company, but they trade at a price/sales ratio of about 1, most of the big plastics companies are chemical or energy giants so that’s not much of a comparison. But clearly, if Metabolix was really going to grow “only” 12% a year, as analysts have on average estimated for the next five years, they wouldn’t be worth nearly what they’re trading at now — that would mean that in five years revenue would still be less than $30 million, for a company that’s currently trading at a market cap of $225 million.

No, investors are clearly looking for much stronger growth than that for Metabolix — and who knows, maybe they’ll achieve that growth. Their lead product is Mirel, the bioplastic that they’re commercializing in a 50/50 joint venture with Archer Daniels Midland (ADM). That partnership is just starting to scale up now with a new manufacturing site, which is why analysts see a big spike in revenues this year and why the company says that they’re “reaching an inflection point,” and they do have plans in place to become much larger than they are now — Mirel is just the first product, they also foresee a big future in bio-derived chemical feedstocks using similar technologies, and in using their genetic technologies and “industrial crop pathway” for oil seeds and biomass in the energy space.

So will it pan out? Well, like I said, it looks a lot better than it did three years ago when they went public, and even a year and a half ago when I wrote about them, but it takes a certain amount of optimism and foresight to see the profitable company that rises from this firm’s technology and R&D — their core businesses are all hypercompetitive, even though they do claim some significant advantages to using their products, so they would have a hard time earning huge premiums for their greener biodegradeable plastics and chemicals absent friendly regulation that might favor them (and which might come, of course). And, of course, though Metabolix has patents and perhaps a unique techology and some good partnerships, they’re not the only company in the world developing bioplastics — Cargill, for one, has its NatureWorks plastics line that appears somewhat similar (Cargill is a private company, unfortunately, though there are rumors of that changing every now and then as one of the family owners pushes to sell their stake). I like the idea, I like the products, and it seems certain to me that this is the stock Eric Roseman is pushing as the developer of a new industrial super-material, but you have to have a telescope to see the profitability on the horizon.

If you’ve an opinion on Metabolix or bioplastics, or anything else, feel free to holler (or whisper) your comment below.

And we’ve only had one review for this service and it’s not tracked by Hulbert, so I have no idea whether or not Roseman has a good track record, or whether most of his subscribers are happy — if you’ve subscribed to Commodity Trend Alert, please click here to let us know what you thought. Thanks!