Is Solazyme a Growth Stock?

Solazyme (NASDAQ: SZYM) rallied toward the end of 2012 following the announcement of Q3 results that beat analyst estimates and promising deals. The renewable oil production company was up 30.56 percent in 2012 as investors reacted to the earnings release. Solazyme reported $0.06 earnings per share in its Q3 results, 20 percent above the Street estimate of $0.05.

Following the company’s Q3 results and guidance for Q4, analysts released their revised estimates with price targets that doubled, or tripled the current market price of about $8.00 per share. Currently, Solazyme ranks among the small cap companies with its market cap of $481 million. However, according to the latest analyst price objectives, Solazyme is about to be promoted to the next tag of companies in terms of market capitalization.

Analysts from Morgan Stanley have a price target of $28 on Solazyme while Goldman Sachs, slightly lowered their price target from $21 to $18. Both analysts continue to rate the stock favorably. Morgan Stanley reiterated Solazyme at Overweight, whereas Goldman Sachs maintained its Buy rating. However, Piper Jaffray analysts reduced their price target from $9.00 to $5.00 per share and maintained Underperform rating. Jefferies & Co has a price target of $23, with a Buy rating. The company’s mean price target is $16.64 per share.

Solazyme’s near term future looks bright, going by the company’s ongoing deals. Morgan Stanley analysts focused on capacity expansion, commenting that it was on track as new partners joined. Goldman Sachs headline noted that, key developments highlight the industry-leading visibility and capacity. However, Piper Jaffray opted for the devil’s advocate stance noting that, lack of demand stands out against new upstream agreements. Jefferies highlight remarked, “new ADM deal, expanded Bunge deal derisk thesis.” All these comments came in the aftermath of blowout results. The big question remains; can Solazyme replicate or go a step further during Q4? this would likely prove to investors that Q3 was never a fluke.

Can These Deals Propell Solazyme’s Growth in 2013?

Solazyme signed a deal with Archer Daniels Midland (NYSE: ADM) to produce oils at ADM Clinton, IA, with an initial production of 20,000 tons per year (tpy), scalable to 100,000 tpy. The project is expected to start bearing fruit within the first half of 2014 using corn-based dextrose. Right now, we could easily say that next year would be a success for the South San Fransisco-based company. However, it remains to be seen whether investors would share the same optimism and boost the company’s stock in the current campaign in anticipation of 2014 gains. While some might choose to wait until then, this could prove too late to make anything, but “de minimus” returns.

Archer Daniels Midland has a mean price target of $30.40 and an average analyst recommendation of 2.8. The Decatur-based company is a direct competitor to Solazyme. It engages in the manufacture and selling of protein meal, corn sweeteners, flour, biodiesel, and other value-added food and feed ingredients. Archer Daniels is the larger of the two rivals/partners with a market cap of $18.72 billion which indicates that Solazyme has a massive room for growth.

In another deal, Solazyme announced a new agreement with Brazil’s Bunge to scale production capacity to 300,000 tpy by 2016. Bunge will also sell and market Solazyme’s tailored foods and oils in the south American country. Additionally, the company noted that its top priority is successful completion of Moema.

The report also noted,

Solazyme “made Soladiesel available for consumers (with Propel), and continued to diversify its offerings by announcing a third tailored food oil, a cocoa butter substitute (~$5 billion market at an average selling price of $5,000/t).”

Caveat

It should be noted that, while Solazyme Q3 EPS beat analyst estimates, its GAAP EPS was in-line with the consensus estimate of ($0.37). Management forecasts FY12 sales of $44 million from the initial prediction of between $44-$50 million. This implies approximately $8.3 million for Q4. So, can this bio products company blowout analyst estimates for a second successive quarter? It’s countdown to the big news.

Bottom-line

Solazyme’s hopes are wrapped around its tantalizing deals which promise continuous growth in the next two to four years. The company made a GAAP loss, which prompted some Buy side analysts, for instance Piper Jaffray and Canaccord Genuity to lower their price targets. However, going by Morgan Stanley, Goldman Sachs and Jefferies predictions, Solazyme stands a better chance to attaining Mid cap status. Does this make Solazyme a growth stock? Only time will tell.