Sunday, January 12, 2014

Speculative Penny Stock Purchase: Metabolix, Inc MBLX

Disclosure: On January 3, 2014 I purchased shares @ 1.23/share

I found this speculative penny stock by screening for companies that were trading near the cash value of the stock. While this is only one way to scan for an undervalued stock, it comes with risk, as investors probably believe that the cash is going to run out. With Metabolix, Inc. that is certainly a risk.

According to most recent SEC filing (November 7, 2013)


Three Months Ended

Nine Months Ended



September 30,

September 30,



2013

2012

2013

2012

Revenue:









Revenue from termination of ADM collaboration

$

$

$

$
38,885

Product revenue

265

70

1,876

457

Grant revenue

563

576

1,871

1,415

Research and development revenue



618


License fee and royalty revenue

27

28

139

162

Total revenue

855

674

4,504

40,919











Costs and expenses:









Cost of product revenue

459

316

2,212

808

Research and development

4,643

4,931

14,446

15,982

Selling, general, and administrative

2,995

3,170

9,728

11,006

Total costs and expenses

8,097

8,417

26,386

27,796

Income (loss) from operations

(7,242
)
(7,743
)
(21,882
)
13,123











Other income (expense):









Interest income, net

10

27

43

102

Other expense, net

(19
)
(29
)
(40
)
(78
)
Total other income (expense), net

(9
)
(2
)
3

24

Net income (loss)

$
(7,251
)
$
(7,745
)
$
(21,879
)
$
13,147












Metabolix is burning through cash like most companies who are trying to bring a product to mass-market. To reach the big leagues, Metabolix needs to grab market share of the biodegradable plastics market - which  is expected to grow 15% by the year 2017. Local government ordinances are eliminating (or charging customers) for plastic bags, the use of biodegradable plastic seems to be a logical solution.

How is Metabolix, Inc situated to capitalize on this market trend?

Per the companies 2012 Annual Report:
Business Strategy
Our goal is to be the leader in discovering, developing and commercializing economically
attractive, environmentally sustainable alternatives to petroleum-based plastics, chemicals and energy. To achieve this goal, we are building a portfolio of programs that we believe will not only provide an attractive slate of commercial opportunities and create value for our business, but will also generate leading and competitive intellectual property positions in the field. 
Creating a Product Portfolio of PHA Biopolymers 
Our strategy is to establish our position in the market with premium priced products that address specialized segments that can be served competitively by the distinctive properties of biopolymers. Through several years of interaction with customers, we have developed formulations of our polymer suitable for injection molding, blown and cast film, sheet and thermoforming. There is the potential to refine these grades further and to tailor them for specific customer performance requirements and applications. In addition, our technology may allow us to develop new formulations and processing protocols to extend the use of Mirel and PHA polymers into blow molding, non-woven, foam and latex applications. 
(Bold emphasis on "premium priced products" added by myself)

Premium priced products work in the cell-phone business (ask Apple) but not always in the plastics business considering most companies are using plastics because it's cheaper than an alternative material. Anyway, given they are struggling finding production facilities & don't have massive capital on the balance sheet - playing in the premium priced market might be well suited for this company. They don't have the ability to create massive quantities of a product - so focusing on more specialized uses might be a better option.

The company had a relationship with ADM (see balance sheet above) from 2004 until 2011. ADM terminated the partnership "citing the projected financial returns from the alliance were too uncertain." (Per 2012 Annual Report)

Okay, so the company was trying to create a PHA Bioplymer product with ADM and it got axed after 7 years of loosing money. That's a big waving red flag saying a big company like ADM invested 7 years and lots of money and gave up.

So, while I do love the overall market story - I don't love (or even like) Metabolix's ability to prove it can actually bring a successful product to market.

So outside the potential growth of the market, what did I see in Metabolix that I liked?

#1 - New CEO Joseph Shaulson has the keys to the car now, and we'll see where he wants to take this company. He has worked in the industry for a a while, so we'll assume he has built up some relationships & contacts that might help the company. We'll also assume Joe Shaulson wants to actually do something, as this business doesn't have a portfolio of products on the market, so he's got some work to do. At the very least, he'll want to get some press-releases out to make it seem like he's doing something.

#2 - Okay, so a new CEO and some press-releases isn't that exciting, but considering where the stock trades ($1.30 as of today) ... some words of confidence or strategy could easily send this stock higher. You also have a 12 month high short-interest building in this stock .... volumes have slid off a bit, so days to cover has risen to about 21 days, but it's off the highs of 2013. So in other words, some positive noise from the C-Suite at Metabolix could squeeze (or at least scare) a few of the shorts out of positions, causing the stock to move higher.

#3 - Short term upside. With some news & movement by the company, I could see it gaping up into the $1.60 - $1.80/share range. Again - there's a new CEO .... chances are he's going to want to be seen & heard. The first chance for a catalyst like this happens January 15, 2014 at the Needham Growth Conference. Just 12 days after I initially purchased shares.

Conclusion

The bio-plastics industry is expected to expand due to consumer demands and government regulation - Metabolix has an attractive story to present to investors. Problem is they haven't proven they can actually manufacture, market, and consistently sell a product of this nature. There's a new CEO, and 2 board members left in January as well too .... we have to assume they will be replaced with fresh faces at some point too.

There are bigger players in this market, so if you want a long term investment - you can find Metabolix's competitors & invest your money with them. I view this is a speculative short-term trade that has the potential to move higher because of new management.

Goals

Projected Investment Length: Short Term (Less than 12 weeks)
Enter Price: $1.23
Stop Loss: $1.00
Projected Exit: $1.60 - $1.80



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