I opened a position last week and will get assigned more shares next week. In all, I will have a 4% position and I’m wondering if this is too high. I’ve read much of the last 10-K and just read the transcript of yesterday’s earnings call.
First, let’s start with the positives. The company has successfully developed and sold product into several attractive markets. By attractive, I mean that most of these markets are enormous and ASPs seem to be high enough to sell product acceptable margins. The target customers in their target markets seem to gain benefits from SZYM’s oils and it doesn’t seem very complicated for customers to switch from their existing oil sources to SZYM oils. Second, SZYM has demonstrated the ability to scale production. This is an important milestone for a number of reasons including 1) profitability and the economics of the business depend on it and 2) customers need assurance of reliable supply. Third, SZYM has managed to ink deals with market leading customers like Unilever and with first class manufacturing partners such as ADM.
Now, let’s touch on some reasons why one might want to be prudent in how much to invest in this company. The company is not yet profitable and profits are not in sight in the near term. Products sales are increasing rapidly (>80% y/y) but the base is small. Manufacturing capacity of 140K MT is coming on line over the next 12-18 months. Recent margins are higher than they will be long term because the cost of producing product has been charged to R&D and therefore has a “zero” cost on the COGS line for some of sold product and remaining inventory. What exactly will margins be in the future? Now, I think that the preceding highlights the main risk. Sales are small so one question is how quickly will demand grow. Ideally, they want to match production capacity with demand as overcapacity is closely and undercapacity will hurt their reputation and hurt future demand. Also, they mentioned that they will be expanding sales efforts to drive demand in their target markets so we can expect SG&A expenses rise in the coming quarters and years. While interest in several target markets has been demonstrated, I think the amount of future demand is the most important open question and the biggest current risk to our investment. If the sales ramp up takes too long we will see their $300M in cash decline (hopefully not to zero). Remember that the company is not yet profitable and we will want to watch for them to drive demand toward 140K MT in the next 18 months. The 10K MT commitment from Unilever is a good start, but it’s nowhere near where they need to be to start turning a profit. Personally, I’d feel a lot more comfortable if I could actually envision where demand for 140K MT in shipped product is going to be come from in the next 18 months. Their cosmetics line is just too small and it will not be enough. Unilever is nice but it would be nice to see the potential demand from Lux and other Unilever products in total MTs. The Encapso looks promising but how many MTs could they ship. I think they mentioned they’re being used in 50 wells and that they US needs 2500 new wells per year to meet current domestic production; a key missing number is how many MTs were shipped for the 50 wells.
Just to reemphasize, demand to meet their projected 140K MT capacity is far from proven. I think some of the missing information can be obtained but some of it will take time to become clearer.
I think 4% is right in the range of what Saul holds. Ultimately it depends on you, but he apparently thinks it’s ok for him.
Yes, but Saul has gone on record saying that this is not a “Saul stock” and a rare exception for him. It’s not only an exception but he’s also put somewhere between 4% and 6% in it. Part of the reason for my post is to remind people that this company still has financial risk (they are running at a loss) and market risk (will the market accept their product in huge quantities). There is potential here but these are two risks that Saul normally steers clear of. Just a note of caution for people not only to look at the potential but also the risks.
I’m at about 1.75%, and might add a little if the sell off continues. The only reason I’m not willing to allocate more is because of the timeline uncertainty. Yes, things are ramping up, but it could be years before this business truly takes off, no? These kind of story stocks usually end up taking quite a bit of time to play out. More time than I would expect Saul to wait around for, but I’m hoping he’s right and I’m a little off base.
Anyway, just keeping my expectations in check with this one.
Yes, SZYM is an exception for me, but the reason that I’m in this one is that “it’s happening” right now. One plant is on-line, the other is very close. Unilever is definitely on board, and took the initiative to announce the algae oils in the Lux soap itself. Algenist just got taken into Norstrom. The Encapso (sp?) oils sound incredible and I imagine they’ll be able to sell pretty much all they produce. They are producing edible oils which are approved for consumption without any question as far as I can tell. Their gross margins are high. They are not even bothering with diesel from their oils at this stage, because their other specialty oils are higher priced and better margins.
Compare this with WPRT when I was panning it, with flat revenue, huge losses, closing plants, reducing the workforce, etc. Not the same picture! (They just had a better earnings report by the way).
Just to reemphasize, demand to meet their projected 140K MT capacity is far from proven. I think some of the missing information can be obtained but some of it will take time to become clearer.
Chris
Nice write up… this is what I have been wondering about… a lot of talk around getting the manufacturing capacity ready but will there be orders and backlog once the have and ability to deliver?
Say they do and they use of the capacity quite quickly which would be a nice problem to have, how easy is it for them to expand and bring in more capacity? I assume it is not just like setting up another manufacturing line and having to buy materials…
Yes, but Saul has gone on record saying that this is not a “Saul stock” and a rare exception for him. It’s not only an exception but he’s also put somewhere between 4% and 6% in it. Part of the reason for my post is to remind people that this company still has financial risk (they are running at a loss) and market risk (will the market accept their product in huge quantities). There is potential here but these are two risks that Saul normally steers clear of. Just a note of caution for people not only to look at the potential but also the risks.
Hi Chris,
I agree with what you are saying and I want to pitch in my 2 cents.
I have to hold myself back from buying a lot more and I may just pick up a tiny bit, but in the beginning I thought this was a half position (1.5%, that’s what I own right now at around 10.88) until they came across with some fulfillment. I missed the May 5th CC but will listen to it and read all I can, hopefully while the stock is still low since if I were to add a bit, it would be here. No problem waiting and then buying at a higher price once they have hit a double somewhere.
FYI
I talk an enthusiastic game but I am pretty conservative until I get some confidence in their performance. My full positions (that were not grown into) are few since it has only been a few months that I decided how big was full.
It’s true that SZYM is a very atypical stock for me, and Chris’ warnings make good sense, but I can’t help myself. The future looks so enormous for this company that I keep nibbling away, and seem to add tiny bits to my position each week.
It’s true that SZYM is a very atypical stock for me, and Chris’ warnings make good sense, but I can’t help myself. The future looks so enormous for this company that I keep nibbling away, and seem to add tiny bits to my position each week.
Hi Saul,
I agree though I don’t nibble. I figure out what I want and then hopefully I get it at a good price, but I am very conservative with my position size.
With SZYM, I intend to jump back in there on Monday (I’ve been out of touch with the market for 12 days) and try to move my 1/2 position to 3/4 position, assuming it stays in that lovely $9 range.
And UBNT…wow, I’ll be all over that manana also…and BOFI which I wanted to increase my position in when it was around the high nineties. I am quite excited at the pricing right now though I don’t have all that much to invest as a decent chunk money has been late. Let’s hope it comes in before Mr Market wakes up or just after some black swan comes sailing down from the heavens and create even better pricing.