CO2 Plant Integration Will Boost Production And Exports

Key Takeaways

• Acquisition and integration of the CO2 processing plant are expected to improve financials through cost synergies, increased capacity, and enhanced revenue streams.
  
• Strategic initiatives, including cost-cutting and renewable fuel export, aim to diversify income and capitalize on premium markets and regulatory incentives.
  
• Operational challenges, declining sales, and asset impairments pose financial risks, while strategic reviews suggest instability and uncertainty in achieving future growth.

Catalysts

Produces, distributes, and markets specialty alcohols, renewable fuel, and essential ingredients in the United States.

• The acquisition of the beverage-grade liquid CO2 processing plant adjacent to Alto Ingredients' Columbia facility is expected to improve financial performance by creating cost synergies and growth opportunities, impacting revenue and net margins positively.
  
• The restructuring and cost-cutting initiatives, such as the cold idling of the Magic Valley plant and workforce reductions, are anticipated to lower expenses by approximately $8 million annually, improving net margins and overall earnings.
  
• The integration of the CO2 processing plant with the Columbia facility offers potential for increased storage and production capabilities, thus tapping into spot market demands and enhancing both revenue streams and asset valuation.
  
• The strategic move to export certified renewable fuel to Europe in 2025 is expected to open up premium markets, potentially boosting revenue as a diversified income stream beyond domestic sales.
  
• The partnership with Vault for carbon capture and storage capabilities at the Pekin campus provides a long-term opportunity to capitalize on CCS credits, which can enhance net income through favorable market conditions and regulatory incentives.

Alto Ingredients Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alto Ingredients's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.2% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $24.6 million (and earnings per share of $0.32) by about May 2028, up from $-60.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Chemicals industry at 20.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.79%, as per the Simply Wall St company report.

Alto Ingredients Future Earnings Per Share Growth

Risks

• The extended approval process for carbon capture and storage (CCS) projects and the existing legal moratorium in Illinois on new CO2 pipelines could delay potential revenue and cost-saving benefits related to carbon markets, impacting long-term revenue projections.
  
• The cold idling of the Magic Valley plant due to unprofitability from unexpected high costs and market dynamic changes reflects significant operational and execution risks, adversely affecting net margins and overall profitability.
  
• Declining sales prices and competitive challenges in the market have led to decreased revenue and gross profit, notably with a reduction in average sales price per gallon year-over-year, impacting earnings potential.
  
• Significant asset impairments, notably the $24.8 million related to Magic Valley and Eagle Alcohol operations, have resulted in substantial financial losses, contributing to a net loss of $41.7 million and affecting the company's bottom line.
  
• The announced strategic review considering asset sales, mergers, or other transactions could indicate instability or uncertainty in achieving organic growth, potentially affecting both revenue streams and investor confidence in future earnings.

Valuation

• The analysts have a consensus price target of $4.5 for Alto Ingredients based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.5, and the most bearish reporting a price target of just $3.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $24.6 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $0.98, the analyst price target of $4.5 is 78.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.