Update on CleanTech Index Performance - And Verenium (Nasdaq:VRNM)

Aug 20, 2008
Author: SCP Editor

August 20 – 2008 – Yesterday we added American Superconductor (Nasdaq:AMSC) to our Clean Tech Index, and the stock is up 5% since that time. Our overall performance, since we launched the Clean Tech Index on April 24, is a gain of 14% with closed positions logging gains of 39% (Akeena short recommendation) and 34% (Composite Technology recommendation).Since April 24, the DJIA is down 11%, the Nasdaq is flat and the S&P 500 is down 8%.

We have been recapping our recommendations lately, talking about LDK Solar (NYSE:LDK) on August 5 at $31, which is trading this morning at the $44-$45 level after having blown away earnings expectations. On August 12, we recapped our recommendation on EnerNOC (Nasdaq:ENOC), which was trading at $15.08, and trades this morning slightly higher at about $15.49. We remain extremely bullish on both of these companies. This morning we will provide an update on Verenium (Nasdaq:VRNM) which, to date, is one of our larger losers in our index, down 21% since we recommended the stock, at $2.98 back on May 5.

To be sure, the controversy over biofuels and its impact on food supply and prices on a global basis remains heated. Critics argue that the biofuel mandates in the U.S. have been a disaster and cannot practicably be reached without exacerbating inflation and food shortages further. In addition, the increase in biofuels feedstock prices as a result of increased demand and production, driven by mandates, has caused margins for biofuels refiners to come under immense pressure. Just look at VeraSun (NYSE:VSE), Aventine (NYSE:AVR) or Pacific Ethanol (Nasdaq:PEIX) as examples of this dynamic. Consequently, as margins have slipped, the sector has been sold off.

The reason why we remain bullish on Verenium is that it is a leader in the development of next generation biofuels here in the U.S. and abroad. One of the promises of cellulosic ethanol is that it doesn’t divert food-based feedstocks to use for biofuels, and for this reason alone, cellulosic avoids much of the political resistance that corn-based ethanol faces. In addition, Verenium is particularly well positioned from an IP perspective, with its specialty enzymes unit, which develops proteins that act as catalysts for biofuels.

Growth Drivers

·         The Energy Independence Act of 2007 has mandated the use of advanced biofuels including cellulosic ethanol into the U.S. fuel supply through 2022. At least 16 billion gallons of the 36 billion gallon mandate will be required to be cellulosic by 2022. (The EPA just rejected a petition to waive 50% of the requirement).

·         The Food, Conservation and Energy Act of 2008 has put in place a $1.01 per gallon production tax credit for cellulosic ethanol

Recent Developments

·         Q2 revenues of $18.3 million, up from $11.1 million, or 64% Y/Y, recording strong growth in its specialty enzymes business

·         Commitment from BP for $90 million in funding over the next 18 months for participation rights in a 50/50 partnership, as well as co-funding obligations to support Verenium’s biofuels technology development. $45 million of the funding will be paid by July 2, 2009, and as of January 2, 2009, Verenium will have been paid $21.9 million.

·         Start-up and commissioning phased at the demonstration-scale facility in Jennings, Louisiana.

·         Received a Department of Energy Grant for development of demonstration scale biorefineries.

·         Received a $5.4 million grant from New Zealand Foundation for Research, Science and Technology.

At $2.43, the stock is trading at about 3.1x P/S (ttm), and we think this is a reasonable multiple in light of the company’s recently announced commitment and support from BP, as well as the strong secular trends that should drive demand for cellulosic through the next decade. At 3x our forecasted revenue target of $77.7 million in revenue for FY2008 (assuming 71m shares outstanding) we arrive at a price target of $3.28, a 34% increase from current levels.

Here’s what the analysts are saying:

·         August 6 – Verenium upgraded to BUY at Broadpoint Capital

·         August 6 – Verenium rated BUY at Jeffries with $5 target.

·         May 9 – Verenium rated buy at Cantor Fitzgerald with $7 target.

Disclosure Note: SCPEditor is LONG VRNM.