Whether we like it or not, there will come a day when our reliance on oil and other fossil fuels will have to be taken over by renewable energy sources. Despite the fact that US oil production is surging and could soon be the world’s biggest producer of the black gold, it is still a smart idea to develop an alternative energy source. Additionally, President Obama has said that he will continue to fund and support alternative energy programs in his second term. I believe Gevo Inc. (NASDAQ: GEVO) stands to benefit.
Gevo is on the renewable chemicals and biofuels side of the alternative energy industry. The company’s main focus is on Isobutanol, a four carbon alcohol that can be used as an added fuel blendstock. The direct integration of Isobutanol into chemical and fuel products that we already use increases the overall economic and environmental value.
The alternative fuel company has already gotten a green light from the US EPA as a fuel additive and is being tested as a fuel source for the US Air Force. Back in June of 2012, Gevo completed its first “alcohol to jet” fuel test in an A-10 Thunderbolt II which was successful. Now, the company has a list of partners that want to use the fuel additive such as Coca-Cola (NYSE: KO), Sasol Limited (NYSE: SSL) and Lanxess, to name a few.
Over the past year, however, shares have fallen 67% as the US economy continues to haggle along with its recovery. To be clear, alternative energy plays are not meant as short term investments and could take a few years before any meaningful integration into society. With that being said, Gevo is well positioned already and could see profitability in the next 1 to 3 years. Looking at the financials, Gevo has a market cap of $79 million and currently has a “buy” rating from analysts. The stock has no price to earnings but is currently trading at a discount to book value at 0.72. Furthermore, price to cash is discounted at 0.86. Another major plus for the stock is its financial strength with a quick ratio of 4.37 and current ratio of 4.55. Additionally, since business model does not require fast amounts of capital, Gevo only has a debt to equity ratio of 0.49.
Generally speaking, alternative energy stocks are hard to love as high entry costs plague balance sheets with years before any meaningful profit is made, if they last that long. Gevo’s main biofuel, Isobutanol, does not require big loans and heavy spending to develop, which makes it easier to own if an investor is interested in the alternative fuel markets. The bottom line here is with a US EPA backing, successful use of the biofuel by the US Air Force and partnerships with big name companies, Gevo is in the beginning stages of a successful business that is surely to prosper.
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