Although Gevo (NASDAQ:GEVO) made a few positive deals recently and it could benefit from multiple government initiatives, the company is still facing difficult hurdles. Moreover, the valuation of GEVO stock remains elevated, given the company’s uncertain outlook.
As a result of the company’s challenges and weaknesses, along with its high valuation, I would stay on the sidelines on this name.
Positive Deals and Government Initiatives
By far the most important transaction that Gevo has made in recent months was a deal with Archer-Daniels-Midland (NYSE:ADM). Under the agreement, the companies will collaborate “to support the production of sustainable aviation fuel (SAF) and other low carbon-footprint hydrocarbon fuels,” the companies stated in a joint press release issued on Oct. 25. ADM’s ethanol and isobutanol would be turned into SAF using Gevo’s processing technology and capabilities, they explained.
ADM is a huge company, with a market capitalization of over $37 billion and 2020 revenue of more than $64 billion. Moreover, its 2020 operating income came in at an impressive $1.77 billion. The company develops many products from agricultural commodities.
Although ADM may have no direct, major business dealings with airlines, its large size, many sales professionals and generally good reputation could enable it to make major fuel supply deals with airlines much more easily than Gevo can. What’s more, the deal provides some validation of Gevo’s technology and products.
Axens, which has an estimated total of nearly 1,300 employees and appears to mainly provide consulting services and products to oil and petrochemical producers, also signed a deal with Gevo last month.
Under the agreement, the companies will focus on accelerating the commercialization of sustainable ethanol-to-jet projects in the U.S. Although Axens appears to be much smaller than ADM, Axens may be more likely to have indirect contacts with airlines. That’s because Axens seems to work closely with oil developers that directly sell fuel to airlines.
Less important deals were signed by Gevo with Chevron (NYSE:CVX) and Kiewit. Chevron could very well be just looking to use a small deal (neither the amount of money nor any other definite measure of the extent of the deal was specified) with Gevo to improve its image. And it appears that Gevo is simply paying Kiewit to engineer and build a new plant for it.
On the government side, in September, the White House explicitly stated in a document that it’s looking to advance “the use of cleaner and more sustainable fuels in American aviation.” Additionally, President Joe Biden issued an executive order that the White House said “will result in the production and use of billions of gallons of sustainable fuel that will enable aviation emissions to drop 20% by 2030 when compared to business as usual.”
What’ more, the Democratic budget, which I still expect to pass, reportedly included, as of last month, $1 billion for biofuel infrastructure.
Difficult Hurdles and Important Weaknesses
In my previous column on GEVO stock, published in April, I wrote that Gevo could struggle to compete with hydrogen, since the latter was already getting publicity and support from governments. Despite the U.S.’s recent actions that may benefit Gevo and Gevo’s deals with two airlines, I still think that the company could end up being well behind hydrogen producers when it comes to supplying fuel for airplanes.
Plug Power (NASDAQ:PLUG), a hydrogen producer, recently announced a partnership with United Airlines (NYSE:UA) to develop hydrogen as a fuel for airplanes, Yet on Gevo’s third-quarter earnings call, held in October, there was no mention of any direct deals with airlines.
Gevo does have an agreement with Scandinavian Airlines, worth up to $100 million over an undefined time period. And Delta (NYSE:DAL) has agreed to buy 10 million gallons of SAF from Gevo per year.
But there is no indication that either airlines is interested in increasing its limited deal with Gevo.
What’s more, my research suggests that Gevo’s SAF could be meaningfully more expensive than green hydrogen.
In December 2019, the company reported that the cost of producing biojet fuels will be 2x to 7x more than conventional jet fuel for the foreseeable future.
Plug Power has said that it will be able to produce green hydrogen for just $1.50 per kilogram. According to The New York Times, hydrogen would be competitive with fossil fuel in planes at a cost of $1 per kilogram.
And the Biden administration thinks that the $1 per kilogram target could be reached in 10 years.
Moreover, research firm IHS Markit in July reported that, SAF prices are about 5x higher than prices for conventional jet fuel.
So while it appears that green hydrogen is closing in on being cost competitive with conventional jet fuel, there are some indications that SAF still has a long way to go to reach that point.
Valuation and the Bottom Line on GEVO Stock
Gevo’s new deals with ADM and Axens have potential. But making me wary about the company’s future are the lack of discussion about airlines on its most recent earnings conference call. its airline partners’ failure to mention interest in extending their limited deals, and indications that its SAF is much more expensive than green hydrogen.
What’s more, GEVO stock is trading for roughly 300x analysts average 2022 revenue estimate for the company. And its market capitalization is $1.33 billion, which isn’t cheap for a company with minimal sales and an uncertain outlook. Finally, as I pointed out in my last column, the orders that the company has announced aren’t very impressive.
Consequently, I advise investors to sell the shares at this point and await more indications that the company’s business is accelerating before buying them.
On the date of publication, Larry Ramer held a long position in PLUG stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.