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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Forecast cloudy, with a chance of rust
Down 46% since its debut on the Nasdaq one year ago, renewable-energy stock Solazyme (Nasdaq: SZYM ) has turned out to be one of the more disappointing IPOs of 2011. One analyst, however, thinks it could soon become the big success story of 2012.
Solazyme shares zipped up 9% Monday in response to news that its Brazilian sugar-to-oil processing center, a joint venture with Bunge (NYSE: BG ) , is on track to begin operations in 2013. Once up and running, the plant is expected to produce 100,000 metric tons of sugar-oil annually.
According to UBS, this is only the beginning: "We expect long term offtake contracts with key customers such as Unilever, Dow, and Chevron (NYSE: CVX ) to materialize as the capacity plans firm up." That's in addition to major government-based customers, such as America's own Department of Defense, which has bought 132,000 gallons of Solazyme-produced biofuel already, and hopes to use even more in the future to power the U.S. Navy's warships. Other customers include Boeing, which proved the concept of algae-based jetfuel in a test-flight run for United Airlines last year.
Ultimately, UBS expects "commercial scale" production of biofuels to evolve into a $200 billion market, on which Solazyme can reliably expect to earn "a 30%+ margin sustainably."
That's a big vote of confidence for Solazyme shareholders, such as the Fool's own Alyce Lomax, who bought Solazyme for her Rising Star portfolio shortly after the May IPO, then bought it again in November.
Like Alyce, UBS is one of the top-performing analysts tracked on Motley Fool CAPS, ranking in the top 10% of investors, according to our data. And UBS has been especially successful in the oil, gas, and consumable fuels industry, where it's made more than 100 separate recommendations over the past six years (each carefully tracked on CAPS) and outperformed the market by a combined 456 percentage points on its oil industry picks.
And yes, Solazyme could one day number among UBS' winners, but I wouldn't bet on it.
Solazyme: Would you buy these numbers?
Let's take a short stroll through Solazyme's financials and I'll show you why not.
UBS may dream of 30%-plus margins at Solazyme, but so far the company's producing, well, a bit less than that. Earnings from operation margins are negative 141%, to be precise. Sales have been growing sprightly, quadrupling between 2009 and 2011, but so far it seems that the more biofuel Solazyme sells, the more money it loses:
- $14 million lost in 2009.
- $16 million lost in 2010.
- Solazyme lost a whopping $54 million last year, and is on track to lose more than $63 million this year.
Similarly, free cash flow at the company is deeply in the red, with $58 million burnt over the past 12 months. And while it's true that Solazyme has enough cash in the bank to fund similar losses for about four more years before it needs to hit up its bankers (or its shareholders) for more cash, the trend doesn't look promising.
The bear case for alternative energy
Bad as all this sounds, it's not even the worst news for Solazyme investors. The really bad news is that no matter what Solazyme does to try and improve its situation, it remains at the mercy of the oil and gas market.
When oil prices are high, as they were last year and earlier this year, a "window" of opportunity seems to open for alternative energy plays like Solazyme. They take out loans, float IPOs, and rush to build factories to produce fuels alternative to oil. Meanwhile, though, the actual oil industry is busy fixing its own problems. High oil costs spur improvements in efficiency and declines in demand, which ultimately result in lower oil prices, often right around the time companies like Solazyme are trying to interest customers in their alternative fuel offering.
And what do we see today? Natural gas prices plumbing $2 depths. Oil prices dropping toward $80 a barrel. That's bad news for the profits at Chesapeake Energy (NYSE: CHK ) and ExxonMobil (NYSE: XOM ) , but at least those companies get to sell more natural gas and oil as lower prices spur demand for their products. Solazyme, meanwhile, gets stuck trying to sell something even more expensive as an alternative to oil and gas, just as they're beginning to look like cheap sources of energy.
Moral of the story: Kermit was right. It's not that easy being green.
So leave Solazyme to the speculators. There's a better way to make money in the oil patch, and you can find out all about it in our new report: "The Only Energy Stock You'll Ever Need." Download it for free right now.