We came across a bullish thesis on Alto Ingredients, Inc. (NASDAQ:ALTO) on the ValueInvesting subreddit page by beezer9717. In this article, we will summarize the bull’s thesis on ALTO. ALTO shares were trading at $1.71 as of Oct 16th. ALTO’s forward P/E is 5 times, according to Yahoo Finance.
Farmers harvesting corn in a field, reminding us of the importance of the company’s ethanol production.
Alto Ingredients (NASDAQ:ALTO) is a producer of specialty alcohols and essential ingredients. It operates a network of ethanol production facilities across the United States. The company has an annual production capacity of 350 million gallons. This makes it as a significant player in the ethanol sector. ALTO generates revenue through the sale of ethanol and its byproducts like distillers grains and corn oil–which are used in various industries–including fuel, feed, and chemicals.
We believe the most important rationale behind investing in ALTO is its undervalued asset base. The stock trades at less than half its tangible book value. A recent transaction in the sector saw GEVO purchase an ethanol plant with 65 million gallons of annual capacity for $210 million. This suggests that ALTO’s 350 million-gallon capacity is worth significantly more than its current market cap of $132 million. In comparison, it has $91 million in long-term debt. Thus, ALTO’s enterprise value remains highly attractive relative to its tangible assets.
Alto Ingredients (NASDAQ:ALTO) also stands to benefit from expanding ethanol demand, both domestically and internationally. The increased adoption of E15 fuel in the U.S.–which uses 15% ethanol versus the typical 10%–is already boosting demand. On the export front, regions like Europe, Japan, and other countries are raising their ethanol blend percentages. Moreover, ethanol’s role as a key feedstock for the growing sustainable aviation fuel (SAF) market presents another growth avenue. This can drive further upside due to tax credits and Carbon Capture and Storage (CCS) investments.
Financially, the ethanol market is seeing expanded crush margins due to declining corn prices, with these elevated margins expected to positively impact ALTO’s balance sheet in the coming quarters. Although margins have eased recently, they remain above historical norms. This provides the company with strong earnings momentum moving forward.
All things considered, ALTO’s combination of undervalued assets, improving operating conditions, and strong future demand drivers positions the company for a potential rally, especially as market sentiment in the ethanol sector improves.
Alto Ingredients, Inc. is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 12 hedge fund portfolios held ALTO at the end of the second quarter, which was 19 in the previous quarter. While we acknowledge the risk and potential of ALTO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALTO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.