US Biofuel Markets Will Suffer From Volatility Yet Recover

Key Takeaways

• Reliance on conventional biofuels and exposure to feedstock price swings threaten stability and long-term revenue growth amid evolving energy demand and market shifts.
  
• Diversification efforts and operational improvements face persistent margin pressure and risks from global competition, regulatory changes, and weather-related disruptions.
  
• Declining ethanol demand, competitive pressures, and volatile input costs threaten Alto Ingredients' core business profitability and limit growth in specialty alcohol markets.

Catalysts

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

• Although Alto Ingredients stands to benefit from extended 45Z tax credits, U.S. biofuel mandates, and favorable regulatory changes that should enhance future earnings, the company's heavy exposure to volatility in feedstock prices-driven by climate events and commodity market shifts-poses an enduring risk to operational margins and the sustainability of these regulatory-driven gains.
  
• While management is aggressively pursuing efficiency and process improvements, including plant modernization and projects to lower carbon intensity, the firm's continued reliance on conventional corn-based ethanol leaves it vulnerable to structural declines in demand as electric vehicle adoption accelerates and internal combustion engine sales decline, threatening long-term revenue streams.
  
• Despite diversification into higher-margin specialty alcohols, essential ingredients, and European export markets, volume and pricing pressure remains, as evidenced by recent declines in high-quality alcohol premiums due to global competition-suggesting future revenue growth outside of fuels will require further substantial investment and faces persistent margin headwinds.
  
• Although operating cost cuts and SG&A reductions have supported short-term improvements in adjusted EBITDA, recurring weather-driven disruptions (such as the recent load-out dock damage), as well as the need for ongoing repairs and efficiency upgrades, may offset cost savings and limit the company's ability to expand net margins over the long run.
  
• While initiatives such as CO2 capture and liquid CO2 processing could unlock new high-value revenue channels, slow infrastructure build-out and increased regulatory scrutiny on both carbon intensity and traditional biofuels could raise compliance costs and delay the realization of anticipated earnings growth from new business lines.

Alto Ingredients Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alto Ingredients compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alto Ingredients's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Alto Ingredients will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Alto Ingredients's profit margin will increase from -7.3% to the average US Chemicals industry of 9.5% in 3 years.
• If Alto Ingredients's profit margin were to converge on the industry average, you could expect earnings to reach $96.8 million (and earnings per share of $1.23) by about August 2028, up from $-68.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.8x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Chemicals industry at 27.0x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.77%, as per the Simply Wall St company report.

Alto Ingredients Future Earnings Per Share Growth

Risks

• Accelerating adoption of electric vehicles and a global shift away from internal combustion engines threatens long-term demand for ethanol-blended fuels, which remains a core business for Alto Ingredients and could erode future revenues and operating margins.
  
• Ongoing reliance on traditional corn-based ethanol production exposes the company to margin compression if ethanol prices stay structurally weak due to oversupply or declining demand, negatively affecting EBITDA and net profitability.
  
• Increased competition in high-quality alcohols, as reflected by lower per-gallon premiums during recent contracting, may undermine efforts to diversify into higher-margin specialty products and limit revenue growth potential in non-fuel markets.
  
• Company financials show continued net losses, with a net loss of $11.3 million in the most recent quarter, pressured by higher interest expenses, volatile derivatives performance, and lower crush margins, which could constrain earnings and long-term shareholder value.
  
• Fluctuating agricultural commodity prices driven by climate volatility, new farm bill changes, and potential trade disruptions introduce significant unpredictability in input costs, putting persistent pressure on Alto's operational margins and future cash flows.

Valuation

• The assumed bearish price target for Alto Ingredients is $2.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alto Ingredients's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 $2.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $96.8 million, and it would be trading on a PE ratio of 2.8x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of $1.14, the bearish analyst price target of $2.5 is 54.4% 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.