Green Plains: Buy the Dip?

The company is stronger today than it has been at any point in the last several years, but Green Plains (GPRE +6.12%) stock has dipped under $20 per share for the first time in nearly a year. The reason is simple and nothing new: volatility in the ethanol market. Positive developments in export markets haven't been able to offset regulatory uncertainty that has taken a bite out of the price of tax credits used to encourage and track ethanol production.

While ethanol still comprises a majority of the company's overall operations, management has been beautifully executing a strategy that seeks to diversify revenue with high-margin businesses. In the last year, Green Plains has acquired cattle feedlots and the world's largest food-grade vinegar manufacturer, which also provide direct access to markets that require ethanol or byproducts from the ethanol manufacturing process. A closer look at these efforts -- and the early payoff -- shows why investors should buy the recent dip in the stock.

Image source: Getty Images.

Not your average ethanol producer

In the first quarter of 2017, Green Plains grew total revenue 18.5% from the year-ago period. All three segments reported year-over-year growth in revenue and operating income. Although much of the overall improvement in the top line was driven by the ethanol segment, the new food and ingredients segment generated the most operating income -- despite being the smallest segment by sales. 

*Includes expenses from corporate activities. Data Source: SEC filings.

As the numbers demonstrate, Green Plains still lives and dies by its ethanol segment, which drove most of the year-over-year improvement in revenue and operating income.

Then again, the numbers also demonstrate that changes are on the horizon. Management's strategy to diversify the business with cattle feedlots and food-grade vinegar are having an outsized impact on the bottom line. What's impressive is that most of the growth-driving acquisitions occurred after October 2016. They're still being integrated into the Green Plains universe and have yet to benefit from post-acquisition growth investments being made each quarter.

The high margins for the food and ingredients segment are likely to stick, too. That's because cattle feedlots benefit directly from animal feed byproducts created during the ethanol manufacturing process, while food-grade ethanol is the starting point in the production of food-grade vinegar. Both are shielded from volatility in the selling prices of ethanol destined for industrial and transportation applications, and neither is in short supply at Green Plains.

GPRE data by YCharts.

What does a sub-$20 share price mean for opportunistic investors? Well, Green Plains is trading below book value of $22 per share. And although the current P/E is about 24, the forward P/E is just 10, according to analyst recommendations compiled by Yahoo!.  Meanwhile, the stock's PEG ratio, which takes into account P/E and future earnings growth expectations, sits at a ridiculously low 0.10. A figure less than 1.0 is considered to hint that a stock is undervalued. 

What does it mean for investors?

Should investors be worried that these growth contributions will be limited going forward, especially considering the first quarter of 2017 was the first full quarter in which recent acquisitions have had an impact?

Growth may slow, certainly, but management hasn't shown any signs of slowing its appetite for acquisitions. Most of the company's cattle feedlot acquisitions were made in 2017 -- some after the first quarter -- while an agreement to sell cattle from the feedlots to Cargill Meat Solutions wasn't in place until the end of April. Throw in growth investments and improvements in operational efficiencies from being vertically integrated with one of the country's leading ethanol producers, and these segments could help to grow the top and bottom lines for years to come.