StreetAuthority’s newest advisory service, The Fast-Track Millionare, focuses on “game- changing companies” with the potential for triple- or quadruple-digit gains. One of Editor Andy Obermueller’s first picks, previewed in this month’s StreetAuthority Market Advisor, is below.
“In a few months, a new pen will be available at office-supply houses and discount stores. On the surface, this low-priced writing instrument—made by industry leader Paper Mate—hardly looks like a revolutionary product. ... But this pen is revolutionary. It’s not disposable. It is biodegradable. It looks like plastic. It feels like plastic. It’s strong and durable like plastic. But it isn’t plastic. It’s not made from petroleum, it’s made from corn. And if you threw this pen into your compost pile, it would disappear in a matter of months with no harmful residue left over.
This plastic substitute is called polyhydroxalkanote, which I think we’d better call ‘PHA.’ It’s a ‘biopolymer’ made by using a special, genetically modified bacteria to eat the sugar out of corn. The bacteria, in processing the sugar it ate, creates PHA as a byproduct. PHA is being made under the brand name Mirel at a $300 million plant in Clinton, Iowa, by an entity called Telles. Telles is a venture of the world’s leading agricultural products processor, Archer Daniels Midland (NYSE: ADM) and a small biotech firm called Metabolix, Inc. (MBLX 14.56 Nasdaq).
“ADM has the corn and the cash to ramp up a production line. Metabolix has the bacteria. The Telles venture will pay Metabolix a royalty of about $0.10 per pound of Mirel produced. The initial production line, one of four to be built, will have an annual manufacturing capacity of 110 million pounds. Once this facility is built out, it will be able to churn out 440 million pounds a year, enough to mean a $44 million royalty to Metabolix—from one plant. More plants will likely be needed. After all, the American Chemistry Council says the world demand for plastics is 74.2 billion pounds a year, which means even if the fully built-out Telles lines run at full tilt they’ll only have 0.00594% of the market, which spells a huge growth opportunity. That’s true for two reasons.
“First, PHA is a good substitute for plastic. It has a lot of uses beyond a $1.25 pen. The material withstands heat, resists water and is sufficiently malleable. It can be processed into sheets, film or injection-molded. Basically anything you can use plastic for you can use PHA for. ... The second factor fueling growth potential is that consumers want ‘green’ products. ... An organic or natural claim is growing increasingly important to manufacturers when they launch a new product. Since most consumer products contain plastic, this trend bodes well for Metabolix.
“The company has 500 patents related to PHA, making it a clear leader in the industry. It’s wisely partnered with a company that can help it achieve meaningful volumes and market Mirel in significant quantities to large industrial consumers. And PHA isn’t the only dance on Metabolix’s card: The company is also expanding its offerings in the space by developing industrial chemicals and plants that actually grow biopolymers.
“The shares are up nearly 84% in the past year, but remain attractively priced. Without earnings to base a valuation model on, one can draw some conclusions from the company’s market cap. At $385 million and a P/E ratio of 25, Metabolix only needs $15.4 million in earnings to be fairly valued. That’s a low bar. Look at it this way, the market—short-sighted as it sometimes can be—is currently pricing in only one full production line, not four. And it is completely excluding the prospect of additional PHA production facilities or the monetization of any of its other products. With that in mind, Metabolix actually looks pretty cheap.”
Andy Obermueller for Paul Tracy & Nathan Slaughter’s StreetAuthority Market Advisor
Second Opinion: Metabolix
“Metabolix jumped on the news that the U.S. Food and Drug Administration approved its bio-degradable plastics products—Mirel F1005 and F1006—for use in food contact applications. ... The company is involved in a number of green research and development projects in plastics, chemicals and energy. They also have solid business partners involved in their efforts. They own, or have licensed, more than 500 patents. Interest in biomaterials and bioenergy will keep MBLX in the limelight. Think long-term with potential for a buy-out (DOW, Monsanto, etc.). My 12-18 month target price is $25.00.”
Eric Dany, Stock Prospector