Investors in Gevo, Inc. (GEVO) have been on quite a rollercoaster last week.
On Friday, shares of the Englewood, Colorado-based renewable fuels-maker collapsed, falling more than 30%, after Gevo announced a plan to issue and sell 38.5 million shares of new stock at a share price of $1.30 apiece -- 29% below where the shares were trading at the time.
That's the bad news. Now here's the good.
Even after Friday's sell-off, Gevo's stock price is still more than twice what it was on Wednesday. And the reason for this is that on Thursday, Geo stock more than tripled in value in response to news that Gevo had secured "a binding Renewable Hydrocarbons Purchase and Sale Agreement" with commodity trading company Trafigura Trading LLC to begin supplying the latter with 25 million gallons per year (MGPY) of corn-based, renewable hydrocarbons, including both "low-carbon premium gasoline" and "sustainable aviation fuel," in 2023. Gevo called the Trafigura deal "our largest single contract to date," and said it will lift the company to an expected $1.5 billion in annual revenue once sales begin.
So in other words, Friday's sell-off was really more of a partial give-back of Thursday's gains -- and not an absolute loss for the stock. It also provides an excellent entry point for investors interested in buying new shares of Gevo -- at least, that's what Noble Capital analyst Poe Fratt thinks.
Fratt penned a note doubling down on his bullish outlook on Gevo. As the analyst explains, not only is the Trafigura deal Gevo's largest ever. It's bigger than all Gevo's previous agreements combined: Gevo's "supply portfolio [will] more than double to 42 MPGY," observes Fratt, which means that prior to this deal, Gevo's entire annual supply commitment was just 17 MGPY, and its projected annual revenue stream was $600 million.
Now, both those numbers are about 150% bigger.
For those unfamiliar with Trafigura, by the way, a few words on why the name is important: Trafigura holds "a leading position as a global commodity trader," notes Fratt, and its decision to partner up with Gevo therefore "validates Gevo's technology and business strategy," reassuring other, future customers that Gevo's product is for-real.
So far, so good. But the analyst closes his recommendation of Gevo stock with an observation that Gevo's strong stock performance this week "could serve as a catalyst for warrant holders to exercise early," and that the money Gevo receives from exercising warrants could be sufficient to at least postpone the company's need to sell even more "dilutive" shares in a secondary offering like the one we saw on Friday.
But here's the thing: When shareholders exercise warrants, they do so to buy more shares. A warrant exercise is therefore essentially just as dilutive as a share offering -- because it basically is a share offering. Moreover, as Fratt notes, the strike price on the warrants in question is $0.60 per share so, for every warrant exercised/share issued, Gevo will be receiving $0.60 cash -- versus the $1.30 it's receiving for shares issued in the secondary offering. Less money for the same number of shares?
To this end, Fratt rates GEVO an Outperform (i.e. Buy) along with a $2.05 price target. This figure implies 66% upside from current levels. (To watch Fratt's track record, click here)
In terms of other analyst activity, it has been relatively quiet. 2 Buy ratings assigned in the last three months add up to a ‘Moderate Buy’ analyst consensus. In addition, the $25 average price target puts the upside potential at 225%. (See GEVO stock analysis on TipRanks)
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