If it's not sales, profits, or credibility that allow biofuel company KiOR (NASDAQOTH:KIORQ) to sport such a high market cap, then what exactly is it? Other highly profitable biofuel companies such as Renewable Energy Group (NASDAQ:REGI) and Green Plains Renewable Energy (NASDAQ:GPRE) show nowhere near as high of valuations. While shares of KiOR are down around 80% since its IPO, it still may have a long way to go in order to justify its valuation.
KiOR reported its third-quarter results on Nov. 7. Revenue was $720,000 compared to $239,000 in the second quarter. Cost of revenue was $19.5 million, and net loss was $43.1 million compared to $27 million a year ago.
Fuel production is starting to pick up. It produced 323,841 gallons in the quarter, finally reaching the 300,000 to 500,000 gallon range it predicted (and missed by 75%) for the second quarter. Production for July and August saw an average of 86,199 gallons. For September, it grew to 151,443 gallons. For October, it grew again to 167,087 gallons.
KiOR is forecasting over 1 million gallons in total production for the full year. At that level, it actually works out to a small sequential drop in gallons produced for November and December at 161,869 gallons each month. KiOR hopes to continue to ramp up production and add a second facility which together should allow it to become cash-flow breakeven in 2015.
In the conference call, CFO John H. Karnes stated, "We're not in a position to provide any forward-looking information at all for 2014 at this point." This makes it difficult to value KiOR based on 2014 when the company itself won't give any guidance.
Cash-flow breakeven to 2015, if it even achieves it, gives you some sort of starting point. In the conference call, Karnes gave the converted total share count for the company of around 180 million shares. This brings the current market cap well over $400 million.
Compare the $400 million market cap to Renewable Energy Group and Green Plains Renewable Energy. These two companies don't just "hope" to one day break even. They are both making money now as you read this article. Both companies have market caps in the $400 million range, only a bit higher than KiOR.
Renewable Energy Group last reported its results on Nov. 5. Not only was it nicely profitable with a net income of $78 million, but it produced 57 million gallons. 57 million gallons seems like pie in the sky compared to just over 300,000 for KiOR. While it's possible KiOR may expand enough to one day surpass Renewable Energy Group in both gallons produced quarterly and even profits, it will take a massive amount of production ramp-up. The current market cap appears to be already pricing in an enormous production increase.
For Green Plains Renewable Energy, it's a similar story. The company reported its results on Oct 29. It produced 176.8 million gallons of fuel. Its EPS was $0.28 for the quarter, and it began to pay a small dividend of $0.04 per share. CEO Todd Becker stated they believe they are positioned to accelerate their growth plans. This means Green Plains Renewable Energy's stock price likely reflects not only current earnings and even a dividend, but it also reflects a degree of growth speculation as well. It seems difficult at best to come up with a scenario as to how KiOR should be priced similarly in market cap to Green Plains Renewable Energy.
Foolish final thoughts
KiOR may one day prove to be enormously successful, but its market cap already prices in at least a large degree of that success. Consider watching from the sidelines as things progress. If the price gets cheaper, and at the same time operations ramp up production to meaningful levels, KiOR may prove to be a great investment at that time. Until then, there are other biofuel companies such as Renewable Energy Group and Green Plains Renewable Energy that might offer similar potential only with far less valuation risk.