I
was recently asked to look into a company called Solazyme. This company engages in the production
of renewable oil with a major focus on chemicals and fuels, nutrition and skin
and personal care markets. This
biotechnology company essentially offers a way to cost effectively create oils
that are useful in food products and alternative fuels. They recently engaged in a joint
venture with Roquette Freres (French starch company) to start building a new 50,000
metric ton/year facility dedicated entirely to food production.
This
is a very small company with a market cap of just $832M and when I first looked
at the balance sheet and FY11 earnings report, I thought this was a terrible
stock. Solazyme reported yearly
revenues of just $39M, with a majority of it coming from their skin care
department. Additionally, the
company has no P/E to speak of because earnings losses accelerated from $16.4M
to $54M (70% drop YOY).
Additionally, Solazyme has negative cash flow and negative margins. The only positive on their balance
sheet is they have almost $220M in cash to just $17.55M in debt, good for
$3.62/share in cash, accounting for 27% of the stock price.
After
digging a little deeper into what this company does and where they are headed,
I think there are some good prospects in the future. First, in looking at their joint venture project with
Roquette Freres, Solazyme is finally starting to make a name for itself in the
food industry with a product called Altein. This is a whole food product with the consistency of flour
that is vegan, gluten-free, non-allergenic and sustainably grown. This protein can be used in many things
from beverages to ice cream and can be used to replace animal feed while
costing less, which is a huge advantage in times of rising grain prices.
However, all of that being said, much progress has yet to be made. Their Phase 1 facility just finished
being built and samples are starting to be distributed to clients. The big piece to the puzzle, their
Phase II facility won’t be completed until late 2013, but once operational, the
company expects revenues from that plant alone could be between $350M-$1B. Solazyme has other advantages over
competitors, namely in their technology.
They have the ability to grow food in controlled environments,
eliminating the yield and quality inconsistencies that weather creates. The company can also choose its own
input resources ranging from sugarcane to forest residue.
While
the company has been around for almost 10 years, Solazyme recently became
public, debuting in May 2011 at $18/share, hit a high in July of $27.26, only
to free fall to an all-time low of $7.68/share in October. Since then, the stock has rallied
almost 80% to today’s close of $13.69.
Looking at Fibonacci retracements, trendlines and resistance/support
levels, the stock is currently sitting near four-month highs and a current
resistance level. Four of the last
six walks traded to a high of $14.24, $14.34, $14.23 and this week’s high of
$14.16. Clearly the $14.20 area is
a decision point and it’s going to take a strong earnings report (Solazyme
reports August 6th) to blow through that level. Taking a look at Fibonacci levels,
Solazyme is trading in the middle of the 23.6% ($12.35) and the 38.2% ($15.24),
the latter a level it hasn’t traded above since the first week in April. Drawing a trendline from the high of
$27.47 in July 2011 to this April’s high of $15.24, the stock has about 37%
downside risk before finding real strong support.
Currently there
are 13 analysts covering the stock with 11 buys, 1 hold and 1 underperform,
with an average 12-18 month price target of $18.18/share ($33% gain from
Friday’s close). Analyst estimates
for FY12 are calling for Solazyme to lose $1.20/share compared to a loss of
$1.22/share FY11, an increase of only 2% YOY. My long-term price target for Solazyme is $17.58/share,
which is the 50% retracement from all-time highs and lows. While that’s a 28% gain from here, I
think the stock goes lower before going higher. At
today’s closing price of $13.69, I cannot recommend buying the stock. I also don’t want you to buy this stock
before the company reports earnings next week. With so many companies getting slammed on weak revenues and
lower guidance, wait to see what earnings look like and listen to what
management says about the future of their new production plant. While I like this stock as a long-term
speculative stock for your portfolio due to its high growth prospects, I would
still wait until the stock pulls back before buying. I would look for the $11.50-$12 range, which you could get
on a terrible jobs number tomorrow followed by weak earnings on Monday. From all of my years of investing, one
thing that I have learned is to wait for your price to buy/sell because when
you start chasing stocks, then that’s when you get your head cut off. If you miss it, you miss it, and you go
get the next one.
Full
disclosure: I currently have no open positions and have plans to buy
Solazyme.
Jeff Lewison
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