Over the past six months, Green Plains’s shares (currently trading at $14.59) have posted a disappointing 11.7% loss, well below the S&P 500’s 21.1% gain. This might have investors contemplating their next move.
Is now the time to buy Green Plains, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Green Plains Will Underperform?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons we avoid GPRE, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Cyclical sectors like Energy often flatter weaker operators during favorable price environments, but a longer-term lens separates those from businesses that can consistently perform across market cycles. Green Plains’s demand was weak over the last five years as its sales fell at a 3.5% annual rate. This was below our standards and is a sign of poor business quality.
2. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
Green Plains, which averaged 5.8% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Green Plains posted positive free cash flow this quarter, the broader story hasn’t been so clean. Green Plains’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 2.2%. This means it lit $2.22 of cash on fire for every $100 in revenue.
Final Judgment
Green Plains doesn’t pass our quality test. Following the recent decline, the stock trades at 8.2× forward P/E (or $14.59 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
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