Is Solazyme Inc Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Solazyme (NASDAQ: SZYM  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Solazyme's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Solazyme's key statistics:

SZYM Total Return Price Chart

SZYM Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

13.8%

Fail

Improving profit margin

(458%)

Fail

Free cash flow growth > Net income growth

(364.8%) vs. (534.8%)

Pass

Improving EPS

(11.9%)

Fail

Stock growth (+ 15%) < EPS growth

(43.2%) vs. (11.9%)

Pass

Source: YCharts. * Period begins at end of Q1 2011.

SZYM Return on Equity (TTM) Chart

SZYM Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(49.7%)

Fail

Declining debt to equity

854.3%

Fail

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Solazyme has gone over about as well as an old chocolate bar floating in a public pool in its three years on the markets. Its two-of-seven score today was awarded entirely on technicalities -- the fact that free cash flow has sunk nearly 400% would surely be a failing effort for most other companies, and share dilution has helped Solazyme avoid a worse decline in its EPS by ensuring that larger losses are spread across far more shares. Despite this abysmal effort, a few investors remain quite bullish on the little synthetic-oil specialist. Will their hopes be rewarded over the long run, or will Solazyme's ongoing financial problems prove too much to overcome in the end? Let's dig deeper to find out.

While it's clear that Solazyme's business has been extraordinarily capital-intensive, investors cheered recent news that the company has finally brought a huge new plant in Brazil online. This 100,000-metric-ton facility blows away the company's previous production capacity and promises economies of scale that were previously unattainable, and since it's already fully operational, Solazyme ought to be able to ramp up production well beyond last year's total -- and at lower prices per unit, too. This plant, jointly owned by Solazyme and Bunge (NYSE: BG  ) , had been long-delayed in starting up, but its capabilities are now quite well-known -- thanks in no small part to an excellent series of exploratory pieces by Fool biotechnology and cleantech specialist Maxx Chatsko (click here for part one and click here for part two).

Chatsko has emerged as the Fool's undisputed expert on Solazyme and its technology, and he's also put together a piece debunking some common arguments against Solazyme. While he's gone into great detail on Solazyme's technology, this article doesn't debunk the oft-repeated refrain that Solazyme's processes are simply too costly to be profitable -- and ultimately, investors do want to see profitability from their investments.

These opportunities seem to lie primarily in food products or lubricants, the latter of which might fulfill the promise of reducing American dependence on foreign oil without requiring Solazyme to become a major fuel producer, which has been an increasingly outmoded knock on the company, as it's been unable as yet to produce biofuel that's cost-competitive to current petroleum options.

However, Solazyme remains dependent on the costs of its inputs. Its largest input is sugarcane to fuel the biological processes of its tailored algaes, and Solazyme has been very lucky here: sugar prices have plunged since 2012. These prices may not stay low forever, though -- after dropping nearly by half from the start of 2012 to the end of last year, sugar futures have already spiked by 25% since the start of this year. Solazyme's higher-margin products could help it ameliorate these fluctuations, but a 25% increase in input costs puts the company's nearer-term profit projections in peril.

Putting the pieces together
Today, Solazyme has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Read/Post Comments (7) | Recommend This Article (0)

Comments from our Foolish Readers

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 June 25, 2014, at 2:00 PM, MayaPinion wrote:

    Why in the world would you subject a company that has only recently commenced operations and is not yet in stable production mode to these criteria? It is like judging a kindergarten student on his SAT scores.

  • Report this Comment On June 25, 2014, at 2:42 PM, Tgar13 wrote:

    Most of their contracts pass cost of sugar to their

    Buyers who are motivated to get the very best

    Product

    They are a development stage company transitioning To the producer stage

    They are destined for greatness

  • Report this Comment On June 25, 2014, at 3:08 PM, RogerKnights wrote:

    I suspect that Maxx Chotsko and/or Kevin Quon will write detailed rebuttals within a week. Here are a couple of obvious points.

    On the margins question, Clinton is already selling product at high margins, and so that all that is needed for it to become profitable is to ramp up its production to nameplate capacity--attainable within 15 months.

    On the sugar-price question, sugar prices were much higher when Moema was planned two or three years ago, so presumably it will not be unprofitable after the 50% fall and 25% recovery in prices since then.

  • Report this Comment On June 27, 2014, at 2:13 AM, RogerKnights wrote:

    Increasing losses in a company moving into the production stage aren't necessarily a bad sign; they can even be a good sign. In Solazyme's case, it has listed about 30 "open positions", mostly high-level executives filling newly created positions. The costs from their salaries and related expenses will be added to Solazyme's expenses next earnings report, and maybe the company will "miss on earnings"--but that's not a negative, it's a positive. It indicates the company is expanding.

    Similarly, witnesses have reported seeing construction activity going on outside one of its US plants that hasn't been reported by the company. If the plant is expanding, that is a good thing--it means that there is demand for its products.

  • Report this Comment On June 27, 2014, at 12:31 PM, TMFBlacknGold wrote:

    @RogerKnights

    "Clinton is already selling product at high margins"

    Um, no. Clinton is selling a mix of products that have an average selling price of $2,600 per MT, but that doesn't mean average costs are below $2,600 per MT. Costs will be higher at Clinton than Bunge, anyway, because it utilizes smaller bioreactors and has to ship unfinished product over 300 miles away to be refined (unless Encapso lubricants).

    We'll have to see how sugar prices affect production costs at Solazyme when it reaches nameplate capacity. Sugar prices will be rising soon as global consumption trends continue to soar and production continues to stagnate, thereby closing the gap and increasing pressure on the market.

    I'm sure it can reach a profit, but whether it can meet the margins it expects is unknown. The oft-quoted numbers in the company's S-1 filing aren't relevant anymore, as they also anticipated bioreactor volumes of 750,000 L and a cane syrup to product ratio of 20 to 1.

    Maxxwell

  • Report this Comment On July 09, 2014, at 11:40 PM, 2beewise wrote:

    What is "name plate capacity"?

    I've been with MF for about 20 yr and this is the first time I've seen the term.

  • Report this Comment On August 21, 2014, at 12:23 PM, georlyn wrote:

    @2beewise

    Nameplate capacity is an old production business term that just means the production operations rated capacity at full-load sustained output. It is derived from the "nameplate" on electrical generators that usually list the manufacturer, the model, and the rated output of said generator. With that said, most companies do not produce at sustained nameplate capacity, simply because conditions need to be ideal or the demand isn't there. I hope that helps!

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