Green Plains Soars After Jefferies' Upgrade to Buy

Green Plains grows after being upgraded by Jefferies to buy from hold.
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Green Plains  (GPRE) - Get Report was soaring Wednesday after Jefferies upgraded the ethanol producer to buy from hold as the ethanol industry rebalances.

Shares of the Omaha, Nebraska.-based company were climbing 26% to $8.81.

Analyst Laurence Alexander, who raised his price target to $16 from $7, said Green Plains is likely to move from cost reductions to growth investments in the second half of the year and 2021 as the ethanol industry is already rebalancing, helped by a sharp recovery in gasoline demand.

"One of Green Plains' long-standing competitive advantages has been its hedging strategy," Alexander said. "We estimate the hedging strategy and refunds under the CARES Act will be a net benefit this year of $2.75-$4.15/share."

Fuel demand tumbled in the face of the economic shutdown caused by the coronavirus pandemic, which were severely curtailed travel due to quarantine and social distancing requirements. 

"With gasoline demand now roughly halfway back to the levels that prevailed prior to the pandemic even as ethanol production has been cut sharply," Alexander said. "The ratio of ethanol production to gasoline is well below the mandate, which suggests inventories should be worked down in the next few weeks."

For the next three to five years, at least, the analyst said, "Green Plains will pursue a hybrid model, with a focus on running the ethanol assets at as low a cost as possible to support the production of higher-value proteins."

Alexander noted that Green Plains has a two- to three-year headstart on technology adoption, "and if, as we expect, some competitors struggle to invest in the upgrades (a consequence of Green Plains and peers opting to run full out) a steeper cost curve could remain in place well into the 2030s."