The advice to Benjamin Braddock in the 1967 comedy-drama film
needs an update: the future is "bio-plastics." At least that's what
Metabolix (Nasdaq: MBLX)
thinks. The company has just received approval from the U.S. Food
and Drug Administration (
) for its biodegradable plastics that can be used in lieu of
traditional petroleum-based plastics. That was good for a +17% pop
in the stock this morning.
Which leads to this question: how do you a value a stock with
little revenues and $35 million in annual expenses? For an answer,
you'll need to make some assumptions. First, what percentage of the
multi-billion market can the company conquer? Second, how much can
the company produce? And lastly, what do profit margins look like?
Market share could prove to be impressive, thanks to the company's
Archer Daniels Midland (
. (Those two firms have created a joint venture called Telles that
will produce the material known as Mirel). It helps that ADM can
supply an unlimited amount of corn, which will be needed to make
the bio-plastics. Metabolix is also working with sugar and tobacco
for alternative forms of enzyme-created bio-plastics. The company
hopes to eventually move into other products such as spandex,
polyurethanes and industrial resins. The short answer: it's
impossible to glean potential revenue growth at this point.
Metabolix has the ability to eventually produce 440 million pounds
of bio-plastics each year at its facility in Iowa. In the
near-term, output will be limited to 110 million pounds a year. But
the company may still struggle to produce the bio-plastics cheaply
enough to compete with traditional plastics. And as history has
shown, businesses and consumers only hop on the green bandwagon
when they aren't asked to pay too high a price.
This is no upstart; Metabolix has been around for 20 years, and
holds more than 500 patents. But the payoff is still a ways away:
ADM pumped $300 million into the project and will need to recoup
that investment before royalties are split. Yet down the road, if
and when royalties roll in, this could be a very high-margin
business model .
Add it all up, though, and there are a lot of unknowns here. The
FDA approval certainly justifies today's stock move, and the
company's market capitalization of around $400 million implies
ample room for a higher valuation if the company can generate real
earnings power. But many promising upstarts in this field have
failed to deliver on their promise in the past, so you may want to
wait for a pullback before dipping into this story stock.
Company Name (Ticker)
|Metabolix (Nasdaq: MBLX)
|Eastman Kodak (
|Borders Group (
|*Based on consenus estimates
prior to recent earnings release
Nearly two weeks ago, turnaround . We thought a turn would come
-- eventually. We advised that "there's no need to buy shares just
yet. That's because analysts had been too aggressive in their
profit forecasts, and will likely need to ratchet them down - that
could pressure shares further in coming sessions." How true. Shares
fell another 20% since then. But they are up a robust +7% this
morning, on heavy volume. The boost is coming from value investors,
but also from some positive buzz. Rumors swirl that Eastman Kodak
may be a candidate for a private equity buyout . You don't want to
buy this name on such speculation, but you do want to consider it
for the real value present. Shares trade for less than 1.0 times
sales, and Kodak has a number of growth drivers that should enable
its rebound to continue. You may have been clever enough to pick up
shares last week when they fell below $5.50, but they're still
compelling at a recent $6.15.
Borders Group (
may be a bit disappointed today. Shares are "only" up +6% this
morning after rising roughly +20% in each of the last three
sessions. Those gains are coming as the bookseller sports a cleaned
up balance sheet , has recently entered the e-books fray and showed
meaningful profit margin gains after recent cost cuts.
But this is a sucker's rally: book sales may start to terminally
decline as e-readers take root, just as what happened with CD
sales. And Borders is ill-equipped to duke it out with the big boys
Amazon.com (Nasdaq: AMZN)
Apple (Nasdaq: AAPL)
Barnes & Noble (
. Borders is still a bricks-and-mortar retailer, and declining
sales can produce negative leverage . The $1.61 a share that
Borders earned in the most recent quarter could prove to be a high
point before the terminal decline sets in.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.