A Biofuel Company That Stands Out

Back in December, fellow Fool Travis Hoium outlined why biofuels specialists like Amyris (Nasdaq: AMRS  ) , Rentech (AMEX: RTK  ) and Solazyme (Nasdaq: SZYM  ) would eventually run into problems, and his argument that there are "way too many barriers in the way, barriers that we originally saw with corn-based ethanol" is convincing.

Specifically, Travis pointed out that while things initially looked good in the prototype labs for ethanol, problems galore started cascading when it came time to ramp up. Once everyone wanted corn for ethanol gas, the price of corn shot up -- and all of a sudden, the value proposition of ethanol wasn't so great anymore.

Today's biofuel producers can use everything from animal fats to wood chips to produce their oils. That type of diversity is great, but the fundamental problem still remains: Whether it's oil or wood chips, when demand outpaces supply, the price of a commodity skyrockets. If biofuels -- as the driver of our future cars, trucks, planes, and boats -- are our future, there is no doubt that animal fats and wood chips would become far more expensive than they are today.

One stock I'm singling out
Of the three biofuel specialists I mentioned above, I think Solazyme stands the best chance of outperforming the market. In the end, it doesn't even need its biofuels to succeed.

Though they have a partnership in place with Chevron (NYSE: CVX  ) , and their fuels have been successfully used in a United Continental flight, on U.S. Naval Destroyers, and Maersk shipping boats, Solazyme has several other fronts on which it can succeed.

First and foremost is its beauty product line -- Algenist -- which uses tailored oils produced by patented micro-algae. The products have sold briskly over the past year. Solazyme's new plant in Peoria, Ill., is now focused on pumping out the algruonic acid used in Algenist. And the company has target gross margins set between 60%-80% for its skin and personal care products -- far better than they could accomplish by just focusing on fuels.

Furthermore, the company is also able to create healthy, tailored oils for use in food products. One brand -- Golden Chlorella -- is already for sale at stores and grocers now, but there are several more to come from the company's joint venture with Roquette Nutritionals. The latest product will be Whole Algalin Flour, and like the beauty products, these food offerings will likely sport better gross margins than fuel.

Though neither food nor beauty products will ever drive the kind of volume that biofuels would, that could be a blessing in disguise. If biofuels do become big, then the feedstock that Solazyme needs to give to its microalgae would become far more expensive. Therefore, the lower-volume, higher-margin food and beauty industries could be just what the doctor ordered.

Multiple futures
Fool co-founder David Gardner has a phenomenal track record, and part of the reason for that is because he likes to invest in companies with "multiple futures." What David means by this is that he likes to invest in companies that are innovative, and could end up dominating any one of a number of different fields.

In Solazyme, we have an excellent candidate with multiple futures -- food, beauty products, and biofuels. Though the company started off just focusing on biofuels, its leadership had the vision to expand its scope.

"In order to succeed, we had to pivot. It was adapt or die. We were right that algae was the best platform to make oil but wrong about how to do it," CEO Jonathan Wolfson said of his company's transformation. "It soon became clear we were making renewable oils."

I've backed up my belief in Solazyme with my own money, and I'm maintaining my outperform CAPScall on my All-Star profile, despite the fact that it's losing to the market right now.

If you're interested in energy companies, but biofuels aren't quite for you, then maybe our special free report is: "3 Stocks for $100 Oil." If you've been following the news lately, you know that oil has already breached this barrier, but it may easily go higher. If you'd like to see which three companies our top analysts think will benefit the most, I suggest getting your report today, absolutely free!

Fool contributor Brian Stoffel owns shares of Solazyme. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Solazyme and Amyris. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2012, at 3:38 PM, TMFBlacknGold wrote:

    The companies usually grouped together with Solazyme produce sustainable chemicals, not just fuels. Gevo, Amyris, Codexis, and others all make and sell chemicals outside of fuels. In fact, Amyris and Codexis blow Solazyme's paultry revenues out of the water.

    They can all be considered to have "multiple futures". Borderline misleading to uninformed investors.

  • Report this Comment On March 01, 2012, at 4:07 PM, TMFCheesehead wrote:

    @BlacknGold-

    True, the others make non-fuels as well. The point of the article wasn't to diss the others, but as I stated in the fourth paragraph, show why "Solazyme stands the best chance of outperforming the market."

    Brian Stoffel

  • Report this Comment On March 06, 2012, at 2:39 AM, lanceim59 wrote:

    BlacknGold is just mad because he invested in Amyris and Codexis and not Solazyme. Eventuallly those two companies will fail while Solazyme will be the only one to succeed.

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