Saturday, June 9, 2007

NutraCea - A Compelling Growth Story

NutraCea (NTRZ.OB) is a company that uses patented technology to produce stabilized rice bran- a process which no other company or competitor has been able to replicate. Stabilized rice bran is a high demand product of which 50-60 million tons gets pretty much spoiled every year, and NutraCea processes the inedible outer bran husk ( which was before considered too perishable and unable to be processed for human consumption) into edible rice bran that is both highly nutritious and affordable.

Although NutraCea has not been able to produce enough stabilized rice bran to fill the demand from continuing supply agreements with governments, nonprofits, food companies, etc., knowing their production capacity gives stable growth visibility. Pricing for their limited production could be a worry, however since they are the only company who is able to produce this product their monopoly in the area has not showed any negative pricing surprises.

Revenues have gone from $5 million in 2005 to $18 million in 2006. 2007 should be in excess of $50 million and based on presently announced capacity the revenue run rate will be in excess of $100 million in 2008. With EPS going from $0.02 in 2006 to $0.10 to $0.15 in 2007 to $0.40+ in 2008, a $0.40 eps in 2008 and a 50 multiple would be $20 per share.

While 1Q numbers were short of expectations which ran the stock up to the $5 level, they really didn't miss anything as they saw $2.6m of deferred revenue from product orders that havn't been accounted for, and will be recognized in the second quarter. Management has been expanding the business beyond the humanitarian potential and into the mainstream food industry, expanding facilities into Louisianna and Montana which would boost capacity from 1,800 tons per year to 2,700 tons per year. Q2 results in August are already looking to be huge with the $2.6 million carryover from 1Q, the Louisianna and Montana expansions.

In the near future, I wouldn't be surprised to see NTRZ get moved from the Bulletin Board onto the Nasdaq, once it trades over $5. What's to stop other companies to come into this space? It would take at least several years for a competitor to develop the same technology that would give the bran a legitimate shelf life that could grant FDA approval. Also, the demand is so high, that it wouldn't really matter for NutraCea anyway.

Lastly, rumors are circulating of a $200 million credit facility that would be used to fund expansion with a large international strategic partner, but of course nothing has been announced as of yet.

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