Equity Analysis and Valuation of Green Plains Collin...

Equity Analysis and Valuation of Green Plains Collin Christian [email protected] Hailey Mercer [email protected] Chris Hresko [email protected] Mitch Prda [email protected] Austin Studebaker [email protected]

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Contents Execute Summary ..................................................................................................................................................... 7

Industry Analysis ...................................................................................................................................................... 8

Accounting Analysis ............................................................................................................................................. 10

Financial Analysis .................................................................................................................................................. 12

Valuation Analysis ................................................................................................................................................. 15

Business Description ............................................................................................................................................ 16

Competitors ............................................................................................................................................................. 18

Industry Growth ..................................................................................................................................................... 19

Market Capitalization: ......................................................................................................................................... 20

Five Forces Model .................................................................................................................................................. 20

Rivalry Among Existing Firms .......................................................................................................................... 21

Industry Growth ..................................................................................................................................................... 22

Annual Percent Change ....................................................................................................................................... 24

Concentration .......................................................................................................................................................... 24

Differentiation ......................................................................................................................................................... 26

Switching Costs ....................................................................................................................................................... 26

Learning Economies ............................................................................................................................................. 27

Economies to Scale ........................................................................................................................................... 27

Fixed-Variable Costs ............................................................................................................................................. 29

Excess Capacity ....................................................................................................................................................... 30

Exit Barriers ............................................................................................................................................................. 31

Conclusion ................................................................................................................................................................ 32

Threats of New Entrants ..................................................................................................................................... 32

Economies of Scale ................................................................................................................................................ 33

Conclusion ................................................................................................................................................................ 34

First Mover Advantage ........................................................................................................................................ 35

Distribution Access and Relationships ......................................................................................................... 36

Legal Barriers .......................................................................................................................................................... 37

Conclusion ................................................................................................................................................................ 38

Threat of Substitute Products........................................................................................................................... 39

Relative Price and Performance and Buyers Willingness to Switch................................................. 39

Bargaining Power of Suppliers ........................................................................................................................ 40

Switching Costs ....................................................................................................................................................... 41

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Importance of Product for Cost and Quality ............................................................................................... 42

Number of Suppliers ............................................................................................................................................ 43

Conclusion ................................................................................................................................................................ 43

Bargaining Power of Customer ........................................................................................................................ 43

Switching Cost ......................................................................................................................................................... 44


Number of Customers .......................................................................................................................................... 45

Importance of Cost and Quality ....................................................................................................................... 45

Conclusion ................................................................................................................................................................ 46

Identifying Strategies that Create Value ...................................................................................................... 46

Vertically Integrating ........................................................................................................................................... 47

Industry Relationships ........................................................................................................................................ 48

Government Regulation ...................................................................................................................................... 48

Geographical Location ......................................................................................................................................... 49

Efficiency ................................................................................................................................................................... 50

First Mover Advantage ........................................................................................................................................ 50

Scale of Production ............................................................................................................................................... 51

Patents/Intellectual Property .......................................................................................................................... 51

Management ............................................................................................................................................................ 52

Conclusion ................................................................................................................................................................ 52

Introduction to Accounting Analysis ............................................................................................................. 53

Key Accounting Policies ...................................................................................................................................... 53

Type 1 Accounting Policies ................................................................................................................................ 54

Vertical Integration ............................................................................................................................................... 54

Government Regulation ...................................................................................................................................... 55

Scale of Production ............................................................................................................................................... 56

Type 2 Accounting Policies ................................................................................................................................ 57

Goodwill ..................................................................................................................................................................... 57

Operating Leases .................................................................................................................................................... 57

Pensions..................................................................................................................................................................... 58

Assessing the Degree of Accounting Flexibility......................................................................................... 58

Operating/Capital Leases ................................................................................................................................... 59

Goodwill ..................................................................................................................................................................... 59

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Evaluation of Actual Accounting Strategies ................................................................................................ 60

Defined Benefits and Pension Plan ................................................................................................................. 61

Research and Development ............................................................................................................................... 61

Goodwill ..................................................................................................................................................................... 62

Capital and Operating Leases ........................................................................................................................... 64

Conclusion ................................................................................................................................................................ 65

Quality of Disclosure ............................................................................................................................................ 66

Qualitative Measures of Accounting .............................................................................................................. 66

Research and Development ............................................................................................................................... 67

Goodwill ..................................................................................................................................................................... 67

Operating and Capital Leasing ......................................................................................................................... 68

Conclusion ................................................................................................................................................................ 69

Identifying Potential Red Flags ........................................................................................................................ 70

Undoing Accounting Distortions ..................................................................................................................... 70

Goodwill ..................................................................................................................................................................... 73

Financial Statements ............................................................................................................................................ 74

Balance Sheet .......................................................................................................................................................... 75

Conclusion ................................................................................................................................................................ 77

Financial Analysis .................................................................................................................................................. 77

Cross Sectional (Benchmark) Analysis: ........................................................................................................ 78

Liquidity Ratios ...................................................................................................................................................... 79

Current Ratio ........................................................................................................................................................... 79

Quick Ratio ............................................................................................................................................................... 80

Conclusion ................................................................................................................................................................ 82

Inventory Turnover .............................................................................................................................................. 82

Accounts Receivable Turnover ........................................................................................................................ 84

Working Capital Turnover ................................................................................................................................. 85

Day Supply Inventory .......................................................................................................................................... 86

Days Sales Outstanding ....................................................................................................................................... 87

Cash to Cash Cycle ................................................................................................................................................. 89

Profitability Ratios ................................................................................................................................................ 90

Gross Profit Margin ............................................................................................................................................... 91

Operating Profit Margin ...................................................................................................................................... 92

Net Profit Margin ................................................................................................................................................... 93

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Return on Assets .................................................................................................................................................... 94

Return on Equity .................................................................................................................................................... 95

Asset Turnover ....................................................................................................................................................... 96

Capital Structure and Leverage Risk Ratios: .............................................................................................. 97

Debt to Equity ......................................................................................................................................................... 98

Altman’s Z-Score .................................................................................................................................................... 99

Financial Forecasting ........................................................................................................................................ 100

Income Statement ............................................................................................................................................... 101

Dividends Forecasting ...................................................................................................................................... 104

Balance Sheet ....................................................................................................................................................... 104

Statement of Cash Flows .................................................................................................................................. 108

Cost of Capital Estimation ............................................................................................................................... 110

Cost of Debt ........................................................................................................................................................... 110

Cost of Equity ....................................................................................................................................................... 111

Backdoor Cost of Equity ................................................................................................................................... 115

Weighted Average Cost of Capital (WACC) .............................................................................................. 116

Valuation Analysis .............................................................................................................................................. 118

Market Comparative Evaluation................................................................................................................... 118

Trailing P/E ........................................................................................................................................................... 119

Forward P/E ......................................................................................................................................................... 120

Price to Book Ratio ............................................................................................................................................. 120

Dividends/ Price ................................................................................................................................................. 121

PEG ............................................................................................................................................................................ 122

P/EBITDA ............................................................................................................................................................... 122

EV/EBITDA ............................................................................................................................................................ 123

Intrinsic Models ................................................................................................................................................... 124

Discounted Dividends ....................................................................................................................................... 124

Discounted Free Cash Flows Model ............................................................................................................ 126

Residual Income Model .................................................................................................................................... 129

Abnormal Earnings Growth ........................................................................................................................... 130

Long Run Residual Income Model ............................................................................................................... 132

Sources .................................................................................................................................................................... 135

Appendix: ............................................................................................................................................................... 136

Capital Structures Ratios: ................................................................................................................................ 136

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Profitability Ratios: ............................................................................................................................................ 137

Liquidating Ratios: ............................................................................................................................................. 138

Method of Comparables: .................................................................................................................................. 142

Regressions: .......................................................................................................................................................... 146

Intrinsic Valuation Models: ............................................................................................................................ 149

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Execute Summary

Analyst Recommendation: SELL (OVERVALUED)

52 Week Range $20.31 - $46.28 2010 2011 2012 2013 2014

Revenue 3.25 Million As Stated 2.21 3.02 3.11 2.68 3

Market Capitalization 1.13 Billion Restated 1.95 1.81 3.48 2.49 2.29

Shares Outstanding 37.94 Million

As Stated Restated Trailing P/E $41.88

Return on Equity 23.76% N/A Forward P/E $47.08

Return on Assets 8.98% 8.64% PEG Ratio $31.70

Price to Book $30.60

Price to EBITDA $57.59

Estimated Adj. R^2 Beta Size Adj Ke EV/EBITDA $53.11

3 Month 9.80% 1.25 13.70%

1 Year 9.80% 1.25 13.70%

2 Year 9.90% 1.25 13.70% Discounted Dividends $11.07

7 Year 9.90% 1.25 13.70% Free Cash Flows $40.11

10 Year 9.90% 1.25 13.70% Residual Income $14.80

Abnormal Earnings Growth $10.69

As Stated Restated Long Run Residual Income $29.30

WACC 4.76% 10.30%

Backdoor Ke 18.97%

Lower Bound Center Upper Bound

Size Adjusted Ke 6.34% 13.70% 21.06%

WACC (BT) 6.43% 10.30% 14.18%

Intrinsic Valuations

GPRE - Nasdaq (5/4/2015)

Cost of Capital

Altman's Z-Score

Financial Based Valuations

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Industry Analysis

Green Plains Inc. is a specialty chemical company located in the Great

Plains region of the United States. Being one of the top ethanol companies, their

main competitors include Valero, Archer-Daniels Midland, and Future Fuel. We

chose these as Green Plains’ main competitors, as a sample of the ethanol

industry, because they obtain similar levels of business activities and corporate

structure. Overall, the ethanol industry is one of high risk, with high fluctuating

sales revenues over the past recent years. Due to government standards and

regulations, the ethanol industry has grown to be a multi-billion dollar industry,

with sales expected to grow even more in upcoming years. In order to

understand the competitive nature of the ethanol industry, we conducted the

Five Forces model in order to accurately evaluate it. Below is a summary of our

findings.

The rivalry amongst existing firms within the ethanol industry is high

due to many factors such as high industry growth, geographic location of plants

in correspondence to suppliers, and innovative ways to produce, market, and

distribute to the consumer. Although differentiation in the product is low, ethanol

remains to be a required portion of gasoline meaning there will always be a need

for it. There is also competition from foreign competitors and can expect

continual opposition with increased foreign production.

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Because companies face a heavy regulation constantly, it is not

easy for a new company to acquire a new plant therefore making the level of

new entry low. Learning economies and first mover advantage also make it

difficult for new to competitors to arise. By being able to influence pricing and

create trends other companies looking to join the industry look to be irrelevant.

The Mid West and Great Plains regions are for the most part taken up along with

a good portion of the suppliers as well, so finding a place to operate would see

almost impossible. Aside from the location and suppliers, distribution access and

relationships that have already been made by existing companies are another big

reason potential competitors deter from joining.

The threat of substitute products is mixed in that is research being done

to potentially find an alternative fuel source but nothing has been proven yet.

Brazil, one of the largest ethanol producers in the world, is working producing a

product from sugar cane that will be equally as efficient but at a lower cost.

The consumer base for the restaurant industry has a mixed-high level of

bargaining power over the companies we are evaluating. The increase in

production of ethanol and lower overall use of fuel in the United States has cause

downward pressure on the ethanol price. Because there is low differentiation in

products, companies can move from supplier to supplier to get the same

product, but might be facing a high switching costs due to the number of

suppliers relative to buyers. Consumers are also looking for the least expensive

ethanol in regards to price as well as transportation. Ethanol companies are at a

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disadvantageous compared to the consumer bargaining power. That being said,

given the fact there is an over supply of ethanol in the market and the price of

oil decreasing, we believe consumers have just a mixed-high level or bargaining

power.

Companies in this industry have low-mixed bargaining power over their

suppliers. Suppliers influence the price the customer pays for goods and the

structure of the contracts between the seller and the buyer. When there are

limited companies in the industry or few substitute products from which the

buyer can choose from, suppliers can become more powerful with their

bargaining power.

Overall, the ethanol industry is highly competitive. By evaluating these

companies operations and corporate strategy we have determined several key

success factors including government regulation, scale of production, and vertical

integration.

Accounting Analysis

Alongside looking at the nature of the ethanol industry, we also analyzed

the accounting polies and procedures presented within the recent 10-K. Because

of the flexibility allowed with reporting by GAAP, it is important analyze

companies financial to make sure there is no distorted information within their

annual and quarterly reports. If a firm does not have a decent amount of

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disclosure, it can be difficult to value. Though it is not required by GAAP to

provide certain information, it is management’s responsibility to inform its

investors of quality information regarding their financial statements.

First, we will identify Green Plains’ Type 1 policies, which include vertical

integration, government regulation, and scale of production. We have analyzed

Green Plains’ disclosures about their key success factors and believe they

disclosure information regarding these factors at the level of other companies

within the industry.

Type 2 accounting policies that have a wider degree of margin for

reporting and possible fabricated results for Green Plains include disclosure about

their operating lease structure as well as lack of disclosure regarding research

and development costs. These items are accounted for in their financials with a

high degree of flexibility and are considered potential red flags.

The majority of Green Plains’ leases are identified as operating, with a

small portion not worth restating identified as capital leases. Because they have

a majority of operating leases, this allows Green Plains to leave a large portion of

liabilities placed off the books. By capitalizing the leases, we are able to see a

better picture of Green Plains’ actual liabilities and obligations.

Through our analysis, we have determined Green Plains’ disclosure is a bit

deceptive to the public due to no disclosure of research and development costs

or any future plans of having any.

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Financial Analysis

The next step after analyzing the accounting policies is to move on to the

financials of the company. A great way to compare and contrast different

companies in an industry is by using ratios. The ratios that we used help describe

the state of liquidity, capital structure, and profitability of the industry and Green

Plains.

Current ratio, quick ratio, inventory turnover, accounts receivable

turnover, cash to cash cycle, and working capital turnover are all a part of the

liquidity ratios. The liquidity ratios shows us how fast Green Plains can turn

assets into cash compared to the other companies in the ethanol industry.

The profitability ratios allow us to see how Green Plains turned revenue

into profit. We showed Green Plains relative to the other companies in the

ethanol industry during the ratio section. The ratios tell us whether Green Plains

is performing up to or below the standard in the industry.

Ratio Performance Trend

Current Ratio Average Increasing

Quick Ratio Average Increasing

Inventory Turnover Average Decreasing

A/R Turnover Average Decreasing

Cash to Cash Cycle Average Increasing

WC Turnover Aveage Increasing

Liquidity

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The capital structure section shows and talks about how Green

Plains is doing compared to the other companies in the industry. Capital

structure ratios allow us to be able to tell how good Green Plains is doing with

their debt and financing. You could also call these your operating and investing

activities. We used the debt-equity ratio and the Altman’s Z-Score to help us

establish where Green Plains was in the industry.


Gross Profit Margin Below Increasing

Operating Profit Margin Below Increasing

Net Profit Margin Below Increasing

Asset Turnover Average Declining

Return on Assets Average Increasing

Return on Equity Above Increasing

Profitability


Debt to Equity Below Declining

Altman's Z Score Average Declining

Capital Structure

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After we got all the ratios we then preceded to forecast Green Plains’

financial statements out 10 years. For the income statement we based

everything off the sales growth that we believed to be somewhat accurate.

Forecasts are reasonable guesses so nothing is perfect when it comes to it. The

balance sheet we used the asset turnover ratio to forecast the assets. During the

equity section we forecasted the retained earnings off of what we felt the

dividends would be in the future. Once we got the forecasted assets and the

equity, we then were able to forecast the liabilities. The forecasts for the

statement of cash flows was harder and lot more unpredictable. With that being

said we can conclude that the statement of cash flows are not as accurate as the

other financial statements.

We then found the cost of debt by taking the rate multiplied by the weight

of long term debt and capitalized operating leases. After the calculation we came

up with 6.13%.

Another step in the financial analysis was determining the cost of equity.

We were able to calculate the cost of equity by using the capital asset pricing

model. The formula for CAPM is below.

Ke= Rf + Beta (MRP) + SP

We were able to find the beta by taking regressions and finding the

highest R^2. Once we got the beta we then calculated the cost of equity. We

finally added the size premium to the cost of equity by figuring out the size

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decile from the market value of the largest company in the industry. The number

that we came up with and used for the remainder of the evaluation was 13.70%.

We found that our industries risk is mostly firm specific and not as much from

the market.

Finally, after getting the cost of equity and debt for Green Plains, we were

able to come up with a weighted average cost of capital (WACC) of 10.40%

before tax.

Valuation Analysis

After completing a comprehensive industry analysis, accounting analysis,

forecasts and financial analysis, we are able to determine a value for Green

Plains Inc. We are then able to base our valuations off of the 4/1/15 adjusted

closing price of $29.32 as undervalued, fairly valued or overvalued.

There are two different types of valuation models; the method of

comparables and the intrinsic value methods. The method of comparables uses

industry ratios to forecast price per share. The method of comparables is used

as a way to quickly determine share prices and does not represent a

comprehensive valuation compared to the intrinsic value valuations.

The intrinsic value methods that were used to value Green Plains Inc. are

discounted dividends, free cash flows, residual income, abnormal earnings

growth and long run residual income. We have decided to use intrinsic value

methods of valuation to value Green Plains Inc. because they value firms at a

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more comprehensive scope than the method of comparables. The models we

used to value Green Plains Inc. are abnormal earnings growth and residual

income. We chose those two models because they were the least sensitive and

because they connect the balance sheet, cash flows and income statement.

Based off respective sensitivity analysis charts of the two models, we have

determined that Green Plains is overvalued with the cost of equity and perpetuity

growth rates. If the cost of equity value percentages were expanded between

9.5% and 6%, Green Plains Inc. appears to be more fairly valued than at the

other cost of equity percentages. Demonstrating that Green Plains would be

fairly valued at a lower cost of equity.

Business Description

Green Plains Inc., formally known as Green Plains Renewable Energy, an

Iowa based company, was founded in 2004. Their corporate headquarters is

located in Omaha, Nebraska, and their trading headquarters reside in McKinney,

Texas. They operate twelve ethanol plants located in several states along the

Great Plains region and operate in four different segments; ethanol production,

corn oil production, marketing and distribution, and agribusiness (operated by

Green Plains wholly owned subsidiary, Greens Plains Grains Company). Their

primary goal, according to their 10-K, is to “seek to maintain an environment of

continuous operational improvement to increase their efficiency and

effectiveness as a low-cost producer of ethanol”.

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Green Plains Inc. produces a variety of products with their main focus on

the production of Ethanol. They currently operate twelve ethanol plants in the

northern and central regions, which together produce one billion gallons

annually. At maximum capacity, these plants together will consume close to 350

million bushels of corn and also produce 2.9 million tons of distiller grains

annually. The ethanol they produce is marketed, sold, and distributed by an in-

house, fee based marketing company, Green Plains Trade Group LLC (10). Green

Plains Inc. is marketed to a variety of consumers, which include national,

regional, and local markets with a variety of customers including energy

companies, traders, jobbers, retailers and resellers. Green Plains Inc. has two

approaches to meet the challenge of distributing and marketing ethanol to their

vastly located clientele. In their local market, Green Plains Inc. uses large loop

trucks to distribute it product within 150-mile range. For further national and

regional markets, the plants have access to rail lines that allow Green Plains Inc.

to sell their product in an efficient and cost effective way (Green Plains 10-K).

In addition to producing ethanol, Green Plains Inc. also operates corn oil

extraction systems at all twelve of their plants. The corn oil product has a variety

of uses, but is primarily marketed “as feedstock for biodiesel as well as

supplement to livestock feed” (Green Plains 10-K 2014). In addition to those

uses, Green Plains Inc. company website states that other industry uses for corn

oil include: feedstock for rubber substitutes, rust preventatives, inks, textiles,

soaps, and insecticides (10). The company’s distribution method for corn oil is

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similar to how they also transport ethanol, by truck and rail, but only includes

locations they consider close to their ethanol plants that would turn out a profit.

Another co-product of the ethanol production process is distiller’s grains.

With the one billion gallons of ethanol Green Plains Inc. produces yearly, they

are also able to produce wet, modified wet, and dried distiller grains. After

lengthened production processes, these grains are used for “high-protein, high-

energy, animal fodder and feed supplements which are marketed to dairy, beef,

swine, and poultry industries. Alternative uses have said to include burning fuel,

fertilizer, and weed inhibitors” (Green Plains 10-K 2014). These distiller grains

come in three different forms, wet, modified wet, and dried grains, which all

have different requirements in when they need to be sold. The wet distiller

grains are commonly sold to feedlots and dairies, but can only be sold locally due

to their short shelf life. The modified wet distiller grains are also sold to feedlots

and dairies, but are more broadly sold because of their longer shelf life, lasting

to about three weeks. Lastly, the dried grains have an infinite shelf life as well as

many uses, and therefore are sold to any vicinity (10).

Competitors

Green Plains Inc. is the fourth largest ethanol producer in the United

States, and because the ethanol industry continues to grow significantly every

year, they face competition from many different companies of all scales. Their

top competitors in the U.S. include companies such as Valero, Archer-Daniels

Midland Company, and Future Fuel. We based competitors off of their size of

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market share, as well as similarities in business activities. Where there are

differences in these firms we will go more into details about such, assuming all

competitors public information is up to date. Green Plains Inc. also faces

competition from foreign competitors and is expecting even more of an

opposition with increased foreign production and the discovery of cheaper

processes. On a smaller scale, farm cooperatives have also been able to compete

successfully, while also changing the way ethanol is typically produced.

There has been new development, although still in the early stages, of

ethanol being produced from other sources such as switchgrass and popular

trees. However, based on little research, future success in this market cannot be

determined or accounted for yet.

Industry Growth

Although ethanol production has seen increases in production in recent

years, currently the ethanol industry is facing a decline in profitability and

accessibility. According to the Wall Street Journal, the ethanol business is under

pressure from the slide in crude oil as well as a 26.6% rise in the price of corn

since September 2014, boosting the price of the industry’s main ingredient (10).

Many in the industry expect smaller or less efficient producers to begin scaling

back production as profitability falls. The combination of pressures has fueled

concerns that the industry’s most-profitable days may be behind it, for now.

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Market Capitalization:

The market capitalization of Green Plains Inc. of $951.56 million at the

end the fiscal year in 2014, falls into the lower half range of its competitors,

which include Valero, Archer-Daniels-Midland Company, and Future Fuel who are

currently listing market capitalizations of $28.35 billion, $31.39 billion, and

$505.86 million respectively (14).

Five Forces Model

To evaluate Green Plains and the ethanol industry we will use the Five

Forces model. This model allows us to compare and contrast competition within

the industry using rivalry among existing firms, threats of new entrants, threat of

substitute products, bargaining power of buyers, and bargaining power of

suppliers. From this, we can expect the Five Forces model to explain what the

positives and negatives of a company are. Each force has a certain level of

competition and it changes for every industry. There are high, low, and mixed

levels of competition, and this allows us to tell if the company is a cost

leadership or differentiation company. Below is a chart that we believe is the

level of competition for each force.

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Ethanol Industry

Competition

Rivalry Among Existing Firms

High

Threat of New Entrants

Low

Threat of Substitute Products

Mixed

Bargaining Power of Buyers

Mixed-High

Bargaining Power of Suppliers

Low-Mixed

Rivalry Among Existing Firms

Rivalry is always a big part of any industry and it plays a big role in

determining how value is created in an industry. Supply and demand determines

if the companies in the industry will be more competitive with pricing strategies.

When demand is low companies tend to compete with each other at a greater

rate than when demand is high.

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In our evaluation of Green Plains we need to compare the company with

others that are similar and in the biofuel industry. We chose to evaluate Valero,

Archer-Daniels Midland, and Future Fuel as the benchmarks in the industry. Each

company of course has a few different features to its company and may compete

in other industries. We will touch briefly on the companies that we chose as

benchmarks, though, are all mainly in the biofuel and ethanol industry, which is

what we will focus on using the Five Forces model. With rivalry among existing

firms, we will look at industry growth, concentration, differentiation, switching

costs, scale/learning economies, fixed-variable costs, excess capacity, and exit

barriers in the biofuel industry because they are the main drivers of competition.

Industry Growth

The industry growth rate is a measuring tool that enables us to compare

different features of a certain industry. In the past few years the biofuel industry

has soared due to concern of nonrenewable resources. Ethanol is about 10% of

the U.S. gasoline market and plays a huge role in the oil and gas industry as well

(Green Plains 10-K 2014). Ethanol is not the only product that the companies we

are analyzing sell, however. This is important to understand because most

companies in this industry were originally in other industries and added biofuel

as a new branch to their company. For example, Archer-Daniels-Midland was

mainly an agricultural company that produced food and feed for livestock. Once

biofuel became a part of the economy, Archer-Daniels-Midland Company hurried

to join the industry. Since biofuel is relatively new, it was not long before the

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demand spiked and the industry grew rapidly. The chart below shows the

revenue for each company as well as the total revenue for the industry. The

numbers can be found in each company’s 10-K.

Revenue (In Millions)

The chart above proves that revenue for most companies was on quite

the climb from 2009 to 2012. From 2012 to 2013 you can see that the revenue

declined in not only Green Plains, but in the industry in general. Some factors

played into this like the price of corn went up and regulations were starting to

take into effect. The biofuel industry annual percent change in that time frame

was a slight -.32% in the graph below. We could conclude that Valero had a lot

to do with the change since they have obviously the most revenue with $138

billion in 2013. Within the companies evaluated, Valero had about 59.7% of the

revenue for 2013.

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Annual Percent Change

From the tables shown below, you can see that the drastic change in rates

across the industry suggest that segmentation exists within the ethanol industry.

There are large decreases from the year 2011 to 2012 within each company,

mainly due to high corn prices and new regulations proposed affecting ethanol

revenues for the year.

Concentration

The Biofuel industry can be very competitive at times due to the volatility

in prices of natural gas. Weather conditions, natural disasters, government

control, and foreign relations can alter the prices in an instant. In the United

States, Archer-Daniels Midland and Valero are within the top three when it

comes to ethanol production, and control much of the market share in the

industry. Green Plains is believed to be the fourth biggest ethanol producer,

according to the Ethanol Producer Magazine (12). Valero and Archer-Daniels

Midland control much of the shares compared to Green Plains and Future Fuel

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$0.00

$20,000.00

$40,000.00

$60,000.00

$80,000.00

$100,000.00

$120,000.00

$140,000.00

$160,000.00

2009 2010 2011 2012 2013

Market Share in Revenue

Valero Archer-Daniels-Midland Green Plains Future Fuel

due to the different segments of their company. As of the end of 2013, there

were 217 producing plants in the United States with 25 just in the home state

(Nebraska) of Green Plains (Green Plains 10-K 2014). The chart on the next page

shows how much market share each company has in its industry. After observing

everything discussed, we concluded that the ethanol industry as a whole are

price takers because of high competition and regulation.

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Differentiation

The ability to differ in goods and services in the same industry to make a

profit is called differentiation. In the world of biofuel there is not much

differentiation when it comes to the industry. There are some companies that do

make ethanol with sugar-cane instead of corn in Brazil. Consumers are not really

looking for differences in the ethanol but mainly just the price of it. When it

comes to the entire company however the company can differentiate in other

segments of their company. Green Plains extracts all the left over corn oil and

produce non-edible products like soap for humans.

Also, they sell the corn oil to the feedstock companies. Valero has ample more

revenue than the other companies because they are also involved in gasoline,

diesel, jet fuel, propane, and asphalt, just to name a few. Archer-Daniels-Midland

is more like Green Plains in that it deals more with the agriculture part but still

has its distinct differences. For example, Archer-Daniels Midland is also in the

industry of crops for human consumption and supplement ingredients for

medicine. As the industry continues to grow more variables are likely to pop up

and compete with each other.

Switching Costs

Switching costs from one industry to another industry can be very costly

for any company to go through. In the biofuel industry it is almost impossible to

just switch out of it completely because the amount of money involved in the

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assets and capital that the company has invested is too high. Also, most of the

assets that the companies have in this certain industry are only meant to

produce ethanol. Green Plains and the other companies could get the oil from

the corn to produce agricultural products to sell. If they did this they then would

not get all the money from their ethanol sales, which produces the most revenue

by a long shot. As long as ethanol is still in demand, all of these companies will

compete in biofuel. Switching costs for a company’s biofuel segment might occur

if another energy source takes the place of ethanol and biofuel.

Learning Economies

The research and development department plays a key role in present and

future sales. In Archer-Daniels Midland’s 10-K, they have a whole page dedicated

on research and development and discuss how their company always strives to

get the best possible products out on the market for their customers. Some of

the main things that they want to improve on are the efficiency of processing

and the development of food, fuel, and industrial products from crops (3). Green

Plains has figured out how to use real-time production to help look over their

plants to get the best possible outcomes (1). As new technologies and products

come out, it is important to stay ahead of the curve to try and optimize profit.

Economies to Scale

Economies to scale also play a huge role in the biofuel industry due to

many different variables. For one, the amount of corn the companies purchase in

28

Year Valero Archer-Daniels-Midland Green Plains Future Fuel Total Industry

2009 35,629.00$ 31,582.00$ 878.00$ 246.00$ 68,335.00$

2010 37,621.00$ 31,808.00$ 1,398.00$ 343.00$ 71,170.00$

2011 42,783.00$ 42,352.00$ 1,421.00$ 382.00$ 86,938.00$

2012 44,477.00$ 41,771.00$ 1,350.00$ 355.00$ 87,953.00$

2013 47,260.00$ 43,752.00$ 1,532.00$ 414.00$ 92,958.00$

order to make the ethanol. The more corn a company can get usually results in

cheaper bushels of corn when averaged out. Each of Green Plains plants requires

20 to 40 million bushels of corn per year (1). Another important reason to

produce in mass quantity is that it lowers the cost of each gallon of ethanol

produced. The more a company produces, the lower they can sell their ethanol

for, allowing them to be more competitive within their industry. In order to be

able to mass-produce ethanol at one time, it requires a high supply of assets on

hand. Based on the graphs below, it is evident that the size of the company

plays a major role in the assets each company holds. Valero and Archer-Daniels

Midland on average have 29 times more total assets than Green Plains in the

year of 2013, and on average 110 times more total assets than Future Fuel. This

would suggest that Valero and Archer-Daniels Midland serve as a form of

conglomerate within the ethanol industry.

Total Assets in Millions

29

$-

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

$70,000.00

$80,000.00

$90,000.00

$100,000.00

2009 2010 2011 2012 2013

Total Assets in Millions

Valero Archer-Daniels-Midland Green Plains Future Fuel Total Industry

The graph shows that the companies have acquired more assets year by

year, telling us that that the companies are using economies to scale to their

benefit. Valero is the only company out of the benchmarks that continually got

bigger every year. Green Plains and Future Fuel are both specialized companies

while Valero and ADM are both conglomerates. This explains why the

conglomerate companies have a lot more assets than the specialized ones.

Fixed-Variable Costs

Fixed costs are costs that do not change per amount of activity whereas

variable costs depend on how much of a unit is produced. Some examples of

30

fixed costs could be plant, property and equipment. Also utilities and

management would be good examples of fixed costs. For variable costs

examples could be direct materials and direct labor.

In the biofuel industry, fixed costs are high relative to variable costs, and

also has high overhead compared to other industries. The cost to produce more

ethanol is small for every gallon produced. With high fixed costs there becomes a

risk involved. The companies have to be able to sell a certain amount of ethanol

per year to be able to break even or a make a profit. Being able to cut down on

fixed costs or increase revenue will decide whether a company is successful or

not.

Excess Capacity

Excess capacity is the amount of space that is not utilized or has not been

filled yet. Some companies have more capacity to operate than others, but that

does not mean that they are utilizing it as well. It is important for any business

to cut or utilize their excess capacity to their advantage. If they do not, then they

could fall behind their competitors in just a short amount of time as well as cost

the firm money. We took a look at the revenue per employee ratio to see where

the companies we benchmarked fell in order. This allows us to be able to see if

companies maybe need to think about laying off employees because they just

have too many of them, excess capacity. Our data sources are from the

company’s 10-K’s.

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Revenue per Employee

This chart shows that Valero is getting the most revenue per employee

while Future Fuel is in last. One reason for this is that Future Fuel is a new

company and only began operations in 2005. According to the graph, Green

Plains is the second highest company with revenue per employee and does not

seem to have much extra capacity when it comes to employees.

Exit Barriers

Every company has exit barriers, even if they do not wish to exit the

industry. Some exit barriers include government regulations and high-specialized

costs for certain assets, which could make it harder to exit. If a company were

trying to exit an industry, they would need to look at the long run costs to

determine the consequences.

In the biofuel industry, companies generally have large warehouses and

silos on their properties. These would not be hard to liquidate and turn into cash

if they needed to exit the industry because an active market for assets, with

farmers and other agricultural businesses willing to purchase them. One concern

32

however is that the equipment within the plants are specialized to make ethanol

and ethanol only. You might have a few other machines that help out with other

tasks, but the majority of equipment is specialized to the biofuel industry,

making it harder to sell off and ultimately leave the industry. Overall, the barriers

to exit are split down the middle. If Green Plains got stuck in a situation where

they could not sell off their assets, they would be forced to continue to be

competitive in the biofuel industry.

Conclusion

We concluded that all the elements in rivalry among existing firms makes

the industry highly competitive and are cost leaders. Ethanol has not yet found

any new technology to differentiation the ethanol itself, making competitors have

to change their pricing strategy and sell for a lower cost. For Green Plains, this

means they have to be very competitive because they do not own the majority

portion of the market share.

Threats of New Entrants

For companies looking to enter into an industry they must take a look at

the threat of new entrants. The threats of new entrants include economies of

scale, first mover advantage, distribution access and relationships, and finally

legal barriers. Each one of these can pose a threat to a company looking to start

at the same level as its competitors in the industry. If there are not too many

33

barriers or threats for a new company to join they should work on keeping

others from entering the industries market share.

Economies of Scale

When a company or industry produces more or less of product and

savings are proportionate, then it is called economies of scale. The bigger the

company generally means they will be able to save more on costs due to being

able to buy large amounts of raw materials at a time. The biofuel industry

companies like Archer-Daniels Midland are able to have an advantage on the

other smaller companies because they can buy more corn at a time. With

companies being able to buy more corn at a time, it helps save the company

money. Green Plains used 238.74 million bushels of corn in 2012 to produce their

ethanol, while in 2013 used 257.66 million. Using approximately 19 million more

bushels in 2013 shows that they saved money on each bushel of corn because of

the fixed costs (Green Plains 10-K 2013). We compared these numbers to

Archer-Daniels Midland’s 912 million bushels of corn for 2013 to see how much

bigger the top companies are.

34

225,000,000.00

230,000,000.00

235,000,000.00

240,000,000.00

245,000,000.00

250,000,000.00

255,000,000.00

260,000,000.00

2012 2013

Bushels

Corn Bushels Used in Green Plains Ethanol Production

Conclusion

New entrants in the industry would have trouble with the larger

companies and would not be able to buy as much corn or other raw materials to

produce their products. The existing companies however could charge less to

their customers because of less money spent in expenses. We determined that

they have a low level of competition for economies of scale.

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First Mover Advantage

Being able to be the first company in the ethanol industry is an advantage

in many different ways. First, the company or companies could determine their

own prices and trends in the industry. Also, the company could create barriers to

entry for new companies trying to join the industry and take away market share.

Creating exclusive contracts with other outside companies for raw materials is an

example of a barrier that could be created.

Archer-Daniels Midland has expanded its company to other parts of the

world, which serves as a big gain in the ethanol industry (3). Because of this,

they have an advantage over Green Plains and other ethanol plants looking to

enter into places like Brazil. Archer-Daniels Midland will have an advantage on

raw materials and personal connections in the regions. In the United States, any

company looking to start a ethanol company in the Mid-West will have a hard

time due to the many plants already existing in this area.

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The map above shows just how concentrated the Mid-West is and how

hard it would be for a new company to join in the ethanol and biofuel industry in

this area. This area is preferred because the plants are close to most of the

farms that produce corn, making it easier to transport corn as well as fuel to and

from the plants, and therefore decreasing costs for the companies.

Distribution Access and Relationships

Distribution Access is the ability to acquire raw materials or sell off the

finished products. Distribution is huge when it comes to any industry and can

easily deter new companies from joining a certain industry. Within the ethanol

industry, companies rely upon the agricultural industry to supply them with raw

materials such as corn. As we previously discussed, the closer a company is to

the supplier, the cheaper the expenses will be. It can be hard for a new company

to find suppliers that do not already have exclusive contracts with other

companies in the industry. Though farmers commonly do not contract their

entire crop, first mover advantage gives companies that are already established

a better chance of acquiring the crop that is for sale.

The distribution to the company’s buyers is similar to the process of their

suppliers. Companies in the industry sell their biofuel and ethanol to oil and gas

companies. Valero on the other hand can use their ethanol and sell it from their

pumps to average people. Finding a good buyer can be hard at times for new

companies since most companies in the industry already have existing contracts

with the oil and gas companies. This is where relationships are critical in not just

37

the biofuel industry but any in that fact. Supplier and customer relations are

important for connecting the crops to the household consumers, which then

drives up returns for shareholders. Relations can also serve as a barrier for some

companies because they may not have any prior contracts or negotiations. In

order for a new company to become profitable, they must acquire as many

supplier and customer relationships as soon as possible. We concluded that the

industry has a low level of competition when it comes to new entrants trying to

gain relationships.

Legal Barriers

Legal Barriers can be defined as anything that the state or federal

government has imposed on the operations of an industry. Some industries have

different or even more barriers than others because of multiple factors. Some

factors could be due to how hazardous it could be to the environment or maybe

to people’s health. For instance, in the restaurant business every restaurant that

wants to sell alcohol has to get a permit, which can be very costly.

With the concerns and knowledge of greenhouse gases in modern days,

the regulations for emissions have become a lot stricter than the past. In the

biofuel industry there are a lot of regulations due to the emissions that the plants

put out when making the ethanol. The Environmental Protection Agency in the

United States requires owners to report their emissions. The industry has to use

certain equipment to release emissions that are regulated and safe for the

environment. With experiments and new theories always coming out, it can be

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very costly for some companies to keep up with the regulations. To comply with

some of the regulations it can mean that you have to redo most of your plant.

This may not be a big concern for a new company coming into the industry but it

can be difficult for existing companies that already have plants used for other

industries wanting to switch into biofuel.

Other regulations for new entrants to look out for could be minimum wage

and state taxes. It’s always worth looking into which states your company would

have to spend less on in taxes.

Conclusion

The industry is full of barriers to entry, which is one reason it is hard for

companies to join in the market share. For companies trying to reach to the level

of Green plains and the other benchmarks, they will have to overcome scale of

economies, first mover advantage, distribution access, relationships, and legal

barriers. All of the big companies in the industry already have a huge advantage

in cost and quality of their ethanol and biofuel.

In the case of first mover advantage, it will be very hard for new

companies to come into the Mid-West and find a good spot for a plant. All of the

existing companies in the industry already have their relationships with the

farmers in the area since they were able to get there first. For new companies

trying to make a major impact in the market share they will have to set up shop

in other places in the United States or have an innovative idea that could change

the industry. An example for new companies to look at is the companies involved

39

in Brazil. Brazil makes ethanol out of sugar cane, which has proved very

profitable. These companies found a new place and different way to make

ethanol. With this being said the competition is low for new entrants to try and

take market share from the existing companies. This supports that the Biofuel

industry is a cost leadership industry.

Threat of Substitute Products

As every industry evolves, so does the technology around them.

Industries have the risk of becoming affected by substitute products. The

existing products that the industry or company puts out may not be taken over

by an exact substitute. The substitute mainly just acts in place of the old product

and provides the same function. Relative price performance and the buyers’

willingness to switch can play a part of the threat of substitute products.

Relative Price and Performance and Buyers Willingness to Switch

Relative price and performance is the ability for a substitute good to come

in and take over by either its price or performance, sometimes both. In the

biofuel industry the product is typically almost the same price from one company

to another per barrel. Also, all ethanol performs the same way and does not

differ in performance. For the biofuel industry there is not much change when it

comes to relative price and performance.

Typically buyers in this industry are looking for the same thing and that is

a biofuel that is the best solution at the time for the environment and the energy

40

industry. For a company or industry to come in as a substitute then they would

either have a relative product that is somehow a lot cheaper or technology

provided a new product that is a lot cleaner for the environment. We concluded

that the competition in the threat of substitute products is mixed because the

performance doesn’t change but there could be a new and improved product

that could take its place in the future.

Bargaining Power of Suppliers

The bargaining power of suppliers is dependent on the amount of

suppliers that exist in a market. Suppliers influence the price the consumer pays

for goods and the structure of the contracts between the seller and the buyer. If

there are limited companies in the industry or few substitute products in which

the buyer can choose from, suppliers could become very powerful in regards to

bargaining power. As of 2012, corn, which plays a major role in the United States

economy, has been grown on over 96 million acres (13). In the ethanol industry,

there are a large amount of corn producers (third party suppliers) trying to sell to

a concentrated amount of ethanol producers. Grain elevator co-ops (second

party suppliers) consolidate several corn producers to one area. The bargaining

power of suppliers in the industry gains strength when moved to secondary

suppliers because the availability of different suppliers is reduced, thus

eliminating product competition.

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Switching Costs

Switching cost is the ease at which a firm or company can switch from

one supplier to another. The number of suppliers plays a major role in

determining if switching cost will be high or low. For example, if a large

concentration of suppliers competes in the market, the switching cost will most

likely be low and easy to achieve. In contrast, a low concentration of suppliers in

the market leads to a high switching cost that is difficult to achieve. In the

ethanol industry, there is a surplus of third party suppliers in addition to many

secondary suppliers. Ethanol companies purchase the majority of the corn they

buy from third party suppliers, such as local farmers in the area. In this case,

switching cost could be considered low, however, difficulties could also arise

because of relationships with different farmers and the number of contracts they

may operate under.

Differentiation

When buying corn to produce ethanol, little to none product differentiation

exists between suppliers. However, differentiation exists when selecting a

supplier. Though corn is considered a commodity and prices are relevantly

similar, the effect of transportation costs can play a large role in which supplier

an ethanol plant selects. Other factors that may determine which supplier is

selected include average rainfall, water levels, and the ability to grow the corn.

Since it takes approximately 86.4 million gallons of water to produce a 140 acre

42

circle of corn, an ethanol company would not want to select a supplier that

operates in a region that is in a drought or has low water levels.

Importance of Product for Cost and Quality

In the ethanol industry, product costs play a significant role for two

companies competing against each other. However, quality is not much different

from supplier to supplier because the Market sets the standard for #2 corn.

Since all corn is the same, the buyer is looking for the supplier from which they

can purchase corn to produce ethanol at the lowest price possible. In this case,

location plays a significant role because the ethanol companies need suppliers

who can transport the product to them the fastest as well as the least expensive.

Drought and other environmental factors can also come into play when

considering cost. An ethanol plant operating in an area that struggles to grow

corn due to drought conditions may have to pay higher corn and transportation

prices from a supplier in the north where there is an abundant amount of rainfall.

In addition to this, other industries also compete for corn availability. For

example, many cattle producers feed with corn or corn by-products. In the event

of a corn surplus, corn is purchased at a lower price. However, when the supply

is low and both ethanol plants and cattle feeders are competing for corn

supplies, the cost of corn will increase.

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Number of Suppliers

Many third party suppliers as well as secondary suppliers are in the

ethanol industry. Since no differentiation exists in types of corn, a great deal of

competition exists between suppliers. These suppliers must not only compete

against other suppliers but also against themselves, the market, and the

environment. The number of companies in the ethanol industry is small

compared to the amount of suppliers; therefore, this increases the competition

between suppliers. Since so many suppliers are in the industry, the suppliers

become price takers rather than price setters.

Conclusion

After considering all of the information, it is apparent that suppliers are at

a disadvantage in the ethanol industry and their bargaining power is fairly low.

All corn is the same so product differentiation between suppliers is non-existent

in the industry. The supplier must rely heavily on price and location in order to

attract buyers as well as a personal relationship with the ethanol company. This

makes the bargaining power of suppliers low to mixed, and bargaining power of

the buyer to be high.

Bargaining Power of Customer

Consumer bargaining power is dependent on the amount of consumers

that exist in a market and the demand for the product. If the buyer group is

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concentrated, the buyer has high bargaining power. The increase in production

of ethanol and lower overall use of fuel in the United States has caused

downward pressure on the ethanol price. According to Forbes Magazine, in 2014

alone, the United States used almost 5 billion bushels of corn to produce 13

billion gallons of ethanol fuel. While this may seem like a large number, there is

little ethanol content in gasoline. Within the ethanol industry, gasoline producers

(the customer) have gained bargaining power. As gasoline producers reach the

government requirements for ethanol use and the price of oil decreases, there is

less incentive and opportunity to lower the cost of gasoline by adding ethanol to

their product. Since oil companies are able to purchase large volumes compared

to the supplier’s sales, they are able to play competitors against each other.

Consequently, gasoline producers currently have the advantage to bargain for

lower ethanol prices due to over-supply and low demand of ethanol.

Switching Cost

Switching cost for oil companies when buying ethanol in most cases can

be difficult and high due to the small amount of ethanol producers in the United

States. Oil companies tend to enter into contracts with ethanol companies that

can last many years making it difficult to switch from supplier to supplier,

especially with the tight supply of ethanol and suppliers barely keeping up with

demand. The number of suppliers of ethanol in the industry is small compared to

the number of consumers due to the permits required for ethanol production

which is hard to get, making new plants unlikely to be built for years. This would

45

usually mean that the supplier would have most of the bargaining power and

switching cost could be high for consumers.

Differentiation

All corn ethanol is the same, therefore there is no product differentiation.

Shipments from different suppliers are often combined, therefore requiring an

identical product.

Number of Customers

Ethanol and oil each play a significant role in in the United States

economy. According to ethanolproducer.com, there are 207 publicly and privately

traded ethanol plants operating in the United States as of January 31, 2015.

Though there are a few amount of ethanol plants in the United States, they are

producing at a surplus amount. Many of the big oil companies that buy from the

ethanol companies also produce their own ethanol, causing an even larger

surplus of ethanol. Because of this, ethanol companies are considered to be price

takers while the oil companies are price setters.

Importance of Cost and Quality

There is little to no difference in the quality of ethanol between companies

competing against each other to produce. The main difference is the price in

which the ethanol companies can produce and sell the ethanol to oil companies.

Oil companies are looking for the cheapest ethanol in regards to price as well as

46

transportation. Since ethanol must be transported by truck or train due to its

water-solubility, location can play a major role in which ethanol plant an oil

company buys from. Ethanol companies must figure out the best way to produce

and price their products in a way that attracts oil companies in order to have

higher sales.

Conclusion

After reviewing all the information it is obvious that the ethanol companies

are at a disadvantage and oil companies are at an advantage when it comes to

consumer bargaining power. Given the fact that there is a lot of ethanol in the

market right now and with the price of oil down, oil companies then have high to

mixed bargaining power. There are two types of categories for creating a

competitive advantage, being cost leadership and differentiation. For the

majority of the ethanol industry, there is not much differentiation amongst firms,

and the product itself cannot be differentiated very much. Therefore cost

leadership is a key factor in determining value. When looking for strategies that

create value, we are looking at activities that drive costs down due to the fact

that the ethanol industry is a price takers market.

Identifying Strategies that Create Value

Ethanol competitors are largely competing on price and not differentiation.

There is a wide range of activities that can help drive down costs and ultimately

47

allow for a more efficient means of productions of ethanol. These strategies may

range from pure location, operating activities to personal relationships.

Vertically Integrating

It has been displayed in most industries that owning the means of

production throughout the whole process from producing the corn to distribution

of ethanol drives down prices. It allows the business to plan, control and react

quicker when producing products. The official term for this type of management

and operation is vertical integration. In the ethanol industry there are three basic

stages, the first being growing/obtaining grains, secondly producing ethanol and

thirdly selling and distributing the finished product. When firms aren’t vertically

integrated, there are a lot of middlemen that need to make money and thus that

drives up the cost each time a middleman is involved. Thus by eliminating the

middle man at every step possible and executing their job as efficiently or better

will help drive down the price of the final product.

Firms in the ethanol industry can vertically integrate in several ways;

including, owning fields that produce the grains, owning silos that store the

grain, owning holding tanks, owning blending plants to blend their ethanol with

other fuels as well as owning the means of distribution. It is important to

remember that just because a company is vertically integrated doesn’t always

mean that it is beneficial, in other words it isn’t guaranteed to help drive down

prices.

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Industry Relationships

The agricultural industry functions a little bit different than other

industries in that relationships are a key driving force for deal making, cost

minimization, growth and efficiency. The agricultural industry values character

and a firms’ connotation can determine the success of a business within the

industry. For a company to be successful in this industry, a company needs to

build positive relationships. For example an ethanol company would want to

develop strong relationships with local farmers to get a pick of the best crop and

ultimately the best price. The relationships built can cut out other competitors

and become a key value driver for the firm.

Government Regulation

When government regulation is mentioned in most cases it bodes bad

news for the industry or company, but for once government regulation is actually

benefiting companies in the ethanol market. With more and more public support

to curb carbon emissions, the U.S. government has been writing regulation to

utilize ethanol in gasoline at higher percentages. With more ethanol being

required to be in gasoline, it will in turn drive up the demand for ethanol.

Additionally, more government regulation is being put in place to put

more ethanol in gasoline in colder regions, because it is harder to rid carbon

emissions when it is cold. Thus the colder the weather conditions, the more

likely ethanol will be in demand.

49

It would be important to recognize a company for their potential lobbying

team that would work to drive positive legislation for the market. It is common

to have a rather large lobbying budget in the energy sector because it is well

documented how energy companies have gained beneficial legislation from

lobbying.

Geographical Location

A huge component to the ethanol industry is geographical location in

relationship to the ethanol’s plant, supply of grain and where it needs to

distribute its finished product. Ethanol producers must first consider where their

supply of grain is located, which for a majority of the industry is located in the

Midwest. Corn is the main ingredient in the production of ethanol and is grown

the most in Iowa, Nebraska and Illinois (8).

Due to the fact that it takes roughly 26lbs. of corn to produce one gallon

of ethanol (6.5lbs.), it is rather obvious that it would cost far more to transport

grain further than it would be to transport the finished product (7). Therefore it

is important for ethanol producers to be located as close to the source of where

the firms get their corn. One more important factor that plays into the transport

of grain from the fields to the plant is whether the grain arrives via rail network

or truck. The ease of access to the plant by either rail or truck can become a

value addition, due to the fact that once again the position of the firm can help

drive down costs. Simple examples of this are if the plant was located just off an

interstate or right off the main line of a railroad. In some instances

50

transportation could be cheaper by truck and at other times it could be cheaper

by rail. It is possible that the most cost effective means of transportation could

fluctuate.

Efficiency

When mass-producing products, as a company you want to be as efficient

as possible. Efficiency helps drive down costs of the final product. At every step

of the process it is essential that steps are taken to enhance efficiency, from raw

material inputs to shipping of the finished goods. In the ethanol industry there

are a lot of possibilities to enhance efficiency. Anything from good relationships,

geographical location and technology has the potential to improve efficiency and

ultimately helps drive down the cost of the finished product. Additional value is

credited to a business that takes these steps in and industry that competes

heavily on price.

First Mover Advantage

Like most industries, the company that enters the market first or adopts a

operation enhancing activity has a major advantage in terms of setting trends,

price and general operations. In the ethanol industry, if an ethanol producer is

the first to move into a new region, they have a major advantage. The company

would have an extra big advantage if they were to move into a region first and

are supplying what the market demands, due to the fact that if a new company

51

would try to move in, it would be difficult for the incoming company to steal

away enough business to make a profit.

Additionally it is important to recognize if a company in the industry is

continually researching and investing in technologies that could lead to more

efficient operations. Technology can provide a competitive advantage in terms

of driving down costs.

Scale of Production

Scale of production goes along with efficiency in many ways, in that the

more product that is produced, generally helps drive down costs. It is more

efficient to ship goods in bulk and produce more products in larger batches than

constantly shipping in smaller quantities and running multiple smaller batches

than one large batch of product. Ultimately producing more products will help

drive down prices, which is the name of the game for ethanol producers.

Recognizing factors a firm takes when scaling up production to guide down costs

creates value for the firm.

Patents/Intellectual Property

A company’s research, technology and methods developed within the

company provide a competitive advantage within the industry. Holding key

patents and rights to technology within an industry can prove to be a

distinguishing competitive advantage amongst other players in the market.

Either the other players in the market have to pay up to license the technology

52

or methods, driving up their costs or competitors will have to develop new

methods to achieve the same end goal, also costing more resources and funds.

A firm’s intellectual property is taken seriously and most firms will fight viciously

to protect it.

Management

The team that is putting together and executing the strategies and

operations has a major influence on the success of the business. It is

managements’ responsibility to execute and grow shareholder value. The

management teams’ age, experience and relationships are factors that can play a

pivotal role in the success or failure of a firm. Key relationships amongst the

management team can open new doors and business deals that can improve

cost leadership. The management teams age should be taken into consideration,

because a team that is executing and young suggests that sustainability is

possible for years to come versus an executive team that is older and will be

retiring soon, creating uncertainty.

Conclusion

With all the key value driver possibilities, it is important to note that just

because a firm is a leader in several categories doesn’t mean that they create

value for the firm. It is the interactions, combinations and execution of the key

value drivers that will govern the value of a firm. With this idea, along with the

ability to sustain key value drivers, value can be assessed and derived.

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Introduction to Accounting Analysis

We will take a closer look into the accounting aspects of Green Plains

based off the five forces. In our accounting analysis, we will be able to analyze

and measure the cost behavior of the company. We will also discuss how key

accounting policies and the degree of potential accounting flexibility will affect

Green Plains. Also when evaluating actual accounting strategy, we will be able to

identify red flags that might pop up. When using key accounting policies we will

attempt to tie them together with our value drivers in the industry analysis. Once

we have tied them together we will then use them to help assess the degree of

potential flexibility. Companies can disclose or place certain items on the financial

statements in many different ways based off of different accounting policies.

After we have figured the degree of potential flexibility we will use it to help

come up with a relative and actual accounting strategy. Using all of this

information we can determine the red flags for Green Plains and adjust the

accounting parts in the financial statements that are distortive.

Key Accounting Policies

A business and industry that can be changed in financial statements can

be analyzed by a company’s key accounting policies. Net income is based on

when expected rather than when there is actual cash flow, which is known as

accrual accounting. Accrual accounting can manipulate a company’s financial

statements.

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We will discuss two different types of accounting policies known as type

one and type two. The format and disclosure of the information from the key

value drivers we discussed earlier while looking at the whole industry is known

as type one. Type two takes a look at the individual company’s potential

distortive items on its financial statements, specifically the balance sheet.

Type 1 Accounting Policies

Under the type one accounting policies we will look at the format and

disclosure of the information from the key value drivers in the ethanol industry.

In the ethanol industry we decided the three main value drivers are vertical

integration, government regulations, and scale of production.

Vertical Integration

In the ethanol industry vertical integration plays a huge part because it

helps save costs, time, and risk. First, vertical integration saves a lot of money

when you can cut out the middleman and do it yourself. For example, in the

ethanol industry they can save a tremendous amount of cash by keeping their

unused corn they bought in bulk in their storage silos. This also plays a key role

in being efficient in time with the corn. During the seasons that corn is not

available, the companies can keep a huge amount of corn in their silos without

having to wait till the next available time the corn is produced. Even if it is in

season they don’t have to wait for the corn to be transported if they always have

a reserve amount in their silos. Risk is also a huge part of vertical integration

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because of numerous things. When using vertical integration companies can

mitigate risk by not relying on other companies to supply your raw materials or

transport the finished product. In the ethanol business the companies using

vertical integration don’t have to rely on storage facilities to hold their corn but

instead have their own storage silos. As a vertically integrated firm, Green Plains

states on their 10k they “maintain disclosure controls and procedures that are

designed to ensure information be required to be disclosed in the reports file

under the SEC’s regulations”. That being said, they actually disclose very little

knowledge on the process of their vertical integration. Overall, vertical

integration is a huge value driver and can help make a company a lot more

profitable in the long run compared to others in the industry that don’t use it.

Government Regulation

Government regulation in the ethanol industry is definitely one of the

biggest value drivers. The reason for this is because in the modern era people

have been putting more emphasis and responsibility on being more energy

efficient. Also people want to be greener and help save the environment around

us. With this being said, the government has seen pressure to pass laws helping

to protect the environment. When it comes to the gas we use, the government

has mandated that a certain amount of ethanol is supposed to be in it. This helps

create demand for ethanol and a big market for the ethanol industry. With added

pressure for more government regulation, we will probably see a higher demand

for ethanol in the coming years.

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Scale of Production

One other value driver that we concluded as a key component in the

ethanol industry is the scale of production. Scale of production can either make

or break a company in the ethanol industry based on how much corn they turn

into ethanol at a time. If the scale of production is used correctly it can create a

lot of value for a firm and put it past its competitors. Since the industry as a

whole are price takers, the companies are highly competing on price. Many

reasons go into this like the lack of differentiation but the high fixed-variable

costs help create the massive scale of production. In the industry the fixed

assets are by far more expensive than the variable costs. Some examples include

storage, equipment, and facility operations. The more ethanol you can produce

at a time will result in lower fixed-variable cost per unit produced. In 2001 Green

Plains produced 1.8 billion gallons of ethanol to 13.3 billion in 2013. (1) Green

Plains saved a lot of money in 2013 per gallon of ethanol compared to a gallon of

ethanol in 2001. This can be concluded with the rest of the industry like Archer-

Daniels-Midland and Valero. Future Fuel is fairly new but you could also conclude

that they have grown in scale of production since they started in 2005. So

obviously ethanol companies try and push the limits on how much ethanol they

can produce at a time and try and take advantage of scale of production.

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Type 2 Accounting Policies

Type two accounting policies deal with items on a company’s financial

statements that have a wider degree of margin for reporting. This leads to

fabricated results that can lead to over stated performances. Accountants at the

firm can use items such as R&D, leases, Pension Benefits and goodwill to

fabricate results because they have looser accounting standards. Green Plains

Inc. as well as the rest of the industry has Operating Leases, Pensions and

goodwill as detectable items on the financial statements. These three items will

be discussed below.

Goodwill

Goodwill is the comprised of what the company determines as competitive

advantages as well as other intangible assets. Goodwill is the premium a firm will

have to a pay in order to purchase a said company. A lot of companies will

recognize competitive advantages and other intangible assets far past their

usefulness, failing to properly impair the assets over time. These actions

effectively overstate financial statements and performance.

Operating Leases

Lease liabilities can be recognized in two different ways under GAAP. Due

to operating leases off-books nature, there is a possibility that an

understatement could occur. The other way that lease liabilities can be

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recognized is when a firm records a lease as an operating lease, in which it is not

recorded as an asset, rather an expense.

Pensions

Pensions consist of money put away for employees’ retirement and due to

the fact that many companies provide pensions, it creates accounting problems.

The problems lie with when to properly expense pensions. As soon as an

employee is employed, a pension asset is created and a pension liability is

created. The pension asset decreases over time to zero as the pension liability

increases due to time value of money. The value of the pension liability can be

determined at any point in time, using the present value formula. The liability

can always easily be known, but the problem lies with the pension asset amount.

To determine the pension asset, the company must estimate employee service

life as well as the value of the employee. The pension expense is the difference

between the changes in pension liability and the pension asset.

Assessing the Degree of Accounting Flexibility

In many industries there is flexibility in how managers can use accounting

policies, some use them in an honest way and other use them to manipulate

results. When a company has a greater degree of accounting flexibility, it is

important to understand how it is used, because it will help provide information

on how the company is run. Within the degree of accounting flexibility mangers

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will have to provide estimations that become important when talking about

Leases/Operating Lease, Goodwill, Pensions and research and development.

In the ethanol industry companies have flexibility in how the policies and

estimations in Leases/Operating Leases, goodwill, pensions and research and

development. Within Green Plains Inc. research and development as well as

pensions do not represent a significant portion of financials, therefore we will not

be discussing those aspects. On the other hand, Operating Leases as well as

goodwill represent a significant enough part of the financials to be analyzed.

Operating/Capital Leases

Operating/Capital Leases have some of the widest accounting

interpretations that companies can use to misrepresent financial results.

Operating and Capital leases work in two different ways. Operating leases simply

are recorded as operating expenses directly decreasing the cash flows. Capital

leases on the other hand are the present value of the leases and are recorded as

an asset. It is important that these capital leases are properly discounted back

and devalued over time.

Green Plains Inc. has operating leases of $31.8 million, another of $1

million of agreements, and capital leases of $10 million.

Goodwill

Intangible assets such as brand image as well as costs from merging and

acquisition costs are characterized as goodwill. These are costs that a company

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pays for acquiring a company’s competitive advantage. Goodwill is essentially a

premium that a company pays over the market value of the assets gained minus

the actual assets and liabilities acquired.

Goodwill is extremely easy to overstate due to the fact that intangible

assets can be abstract and biased due to personal opinion. Not only can it be

over realized, but it can also be under depreciated or impaired over its useful life.

Thus effectively overstating assets, understating expenses and overstating net

income. Green Plains Inc. has $40,877,000 of goodwill, representing 20% of the

net fixed assets for 2014. We determined that goodwill representing 20% or

more of net fixed assets as being an aggressive accounting strategy, but due to

the fact that goodwill isn’t 30% or more of net fixed assets, goodwill is within the

parameters of not being material enough to be restated.

Evaluation of Actual Accounting Strategies

When disclosing accounting information, we used different strategies as

well as different standards of what we feel are necessary to share with the

public. Investors and other benefactors rely on this information to make

important economic decisions on the company they are evaluating. Two types of

accounting strategies we used; one being an aggressive approach, which reports

a higher income than actually earned by overstating assets and retained

earnings, while the other being a more conservative approach that overstates

liabilities which lowers the earnings of the company. Although GAAP does have a

required minimum amount that has to be disclosed, companies have the ability

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to alter their statements where they deem most beneficial. Through these

alterations, we can change the true perspective of their actual value. When

valuing a company, it is important to understand the transparency they portray

and the approach they take when stating financial information.

Defined Benefits and Pension Plan

Green Plains Inc. provided a pension plan up until January 1, 2009, when

the benefits became frozen. They are still obligated to fulfill the requirements of

previous benefactors, but the amount is not large enough to be relative to the

accounting strategy.

Research and Development

There are no research and development costs reported on Green Plains’

income statement. That being said, the company does mention ongoing research

processes throughout the 10-K that could increase efficiency and profitability, but

does not associate any specific costs. Also included in their 10-K, Green Plains

Inc. discusses new risks of cellulosic ethanol that could replace corn ethanol,

which could in turn reduce their profitability. This information is beneficial to

potential investors and also provides one of the few examples of their level of

transparency to the public.

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Goodwill

Goodwill is measured as the excess of the cost of the purchase over the

fair value of the identifiable net assets (assets less liabilities) purchased. This is

classified as an intangible asset that if not impaired properly, will cause an

overstatement of assets (15). Because goodwill is an intangible asset, firms can

choose whether or not to impair goodwill during the year and at what rate.

Green Plains has a more aggressive approach when it comes to their goodwill,

and chooses to postpone impairment because of its immaterial amount. Goodwill

accounts for approximately 20% of Green Plains net fixed assets, making it

irrelevant and non-altering of investor’s perceptions of the company’s value.

In order to measure whether goodwill is being used aggressively or

conservatively, we took the goodwill amount from each of our main competitors

over their net fixed assets for the past five years.

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Green Plains does not have much goodwill stated on their balance sheet in

the past five years, with new additional goodwill from years 2011-2014. In this

way it is not a large portion of their total assets, long term assets, or PP&E.

Green Plains and Archer-Daniels Midland were in fact the only two out of the four

ethanol companies to have identified goodwill on their balance sheets, and just

Archer-Daniels Midland would need to restate goodwill in year 2014. By delaying

their goodwill, Green Plain indicates that they have more of an aggressive

accounting strategy. They also state in their 10-K that they would only feel the

necessity to impair goodwill under the circumstance the carrying amount of an

asset exceeds its estimated future cash flows, and has no plans of impairing

goodwill in the near future. Green Plains somewhat discloses the two-step

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

Green Plains

Valero

Archer-Daniels

Future Fuel

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process they use if they deem necessary to perform impairment on goodwill, but

this only represents the process and not any actual impairment.

Capital and Operating Leases

In order to be able to compete successfully in the ethanol industry, Green

Plains must expand their production process to additional plants and equipment.

For this to happen, they must obtain operating and capital leases in their

business. Although both capital and operating leases deal with acquiring land

and equipment for use, they differ on how they effect the books as well as how

they are recorded. Capital leases allow the firm to accept some of the risk of

ownership, making it a liability recorded on the balance sheet. Operating leases

however obtain no ownership and therefore are treated as a rent expense (14).

Due to Green Plains having operations located in various states

throughout the U.S., they hold a majority of operating leases, which would

classify them as having a more of an aggressive accounting strategy. They lease

certain facilities and parcels of land under agreements that expire at various

dates. For accounting purposes, rent expense is based on straight-line

amortization of the total payments required over the lease term (1). Having

these high operating leases and managing their accounting in this way gives

them the advantage of reporting lower liabilities ultimately showing a higher net

income. Green Plains also has capital leases as well, totaling $10 million but we

did not find this to be material or relevant enough to their accounting strategy.

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As shown in the chart above, operating leases of $32.8 million, $20.8

million, $19.2 million in years 2014, 2013, and 2012, respectively were not a

large portion of total expenses. In retrospective, these operating leases account

for a small percentage of the company’s operations and are amortized over the

life of the lease. Because Green Plains is open to sharing the allocation of where

their operating leases costs derive from, we have concluded they have a fairly

high level of disclosure, and their method of accounting dealing with leases by

keeping them off the balance sheet shows they have an aggressive approach to

accounting these leases.

Conclusion

Overall, Green Plains has shown more of an aggressive accounting

strategy when accounting for both goodwill and operating leases. In doing so,

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012 2013 2014

Operating leases

Total expenses

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this leads to a bit of a deception to the public to make their business appear to

be more profitable than actually so, as well as to seem more attractive to

investors. The main reasons for concern would be the non-disclosure of research

and development costs and any future plans of having any. Goodwill and

operating leases provide adequate information to draw conclusions on future

costs and operational plans.

Quality of Disclosure

GAAP is the governing body of accounting rules and policies that

determine the recordings of financial information as well as the level of

disclosure. Within GAAP there are discrepancies that managers and accountants

can use to report and disclose information in different ways, some significantly

altering the financial results and can be deem results falsified. When determining

the quality of disclosure in Green Plains Inc. it is important to understand the

level and depth of the ways they provide their accounting methods and

procedures. The amount of info disclosed is also important, seeing how GAAP

doesn’t always force multiple items to be made available. There is a higher

likelihood of quality of disclosure with more information that is disclosed to the

public.

Qualitative Measures of Accounting

The qualitative measures of accounting deal with how the company and

managers disclose their information through words and the connotation

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attributed to their words. Companies can use text to misrepresent information by

bolstering or hiding key informative measures. In this section we will analyze

whether Green Plains Inc. properly discloses information or if they are

intentionally misleading the public. We also need to determine if Green Plains

Inc. is overly embellishing its results through their tone.

Research and Development

When dissecting Green Plains Inc.’s 10-K, very little information is given

regarding research and development operations. They go on to explain their

areas of research and development but Green Plains Inc. does not disclose any

physical expenses for any of their activities. This reporting is vague and

suggests that research and development represents a minuscule part of their

expenses. This leads us to question exactly how much research and

development is occurring.

Goodwill

Green Plains Inc. does not disclose a lot of specifics in terms of their

allocations of goodwill. The most detail Green Plains goes into is that they break

down goodwill into only two categories. $30,300,000 of goodwill is attributed to

their ethanol business and $10,600,000 is attributed to their marketing and

distribution segment. There is also an additional $1,000,000 worth of

agreements recognized as goodwill. There is no further break down with exact

numbers per facility or operations.

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Green Plains Inc. does go into detail how they impair and constantly

reevaluate rates to determine fair value. Green Plains Inc. reevaluates goodwill

per plant and facility annually or when events occur that indicate impairment

could change. Green Plains Inc. will assess if they need to go through a two-

step impairment test; first determining if the fair value is less than the carrying

value, then the company performs a second step. If the estimated fair value of

the reporting unit is less than its carrying value, we complete a second step to

determine the amount of the goodwill impairment that we should record. In the

second step, we determine an implied fair value of the reporting unit’s goodwill

by allocating the reporting unit’s fair value to all of its assets and liabilities other

than goodwill. We compare the resulting implied fair value of the goodwill to the

carrying amount and record an impairment charge for the difference (Green

Plains 10-K 2014).

Operating and Capital Leasing

Green Plains Inc. went into considerable detail when providing information

about their operating and capital leasing. Green Plains Inc. operating leases

covered and identified grain storage, facility, aircraft, transportation, land and

many other small operating items. The in-depth disclosure of the operating

leases is valuable information for insight into the company’s operations.

We determined the 2014 discount rate of 3.37% for the operating leases

based on the cost of borrowing debt in the agribusiness of 3.5% and the rate of

3.25% from the cost of borrowing debt in the corporate segment. We took the

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average of these two figures and got 3.37%. The rate we determined of 3.37%

to adjust operating leases is very close to Green Plains Inc.’s rates of borrowing

debt. Due to the fact that these rates are close to the rate we determined, there

is little cause for concern that operating leases are being over stated.

Green Plains also determined capital leases in a fairly descriptive way.

The term loans and revolving term loans bear interest at various rates, with the

majority of all such loans having interest rates between LIBOR plus 3.85% to

5.50% or lender-established prime rates plus 3.50% to 4.50%. (1) Green Plains

Inc. went on to mention that there are small and insignificant capital leases on

equipment. Green Plains Inc. gives a solid description on the rates they are

borrowing at. Green Plains Inc. has 10,000,000 of capital leases on acquisitions.

In total Green Plains Inc. has 14,000,000 of capital leases between grain facilities

and equipment. They did not go into detail on specific grain facilities or items of

equipment.

This leads us to conclude that the level of disclosure is substantial

considering the detailed demonstration of how they arrived at the rates and how

similar the rates are to what we concluded.

Conclusion

Overall the level of disclosure is sufficient, due the specifics detailed by

Green Plains Inc. Green Plains Inc. specifically describes their rates and locations

of debt.

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Identifying Potential Red Flags

Red flags are classified as items presented on a company’s financial

statements that would cause a concern and call for a deeper look. These areas

cause potential concern for investors who are looking at financial statements in

order to see if the company would be a good investment for them. For Green

Plains we will be looking further into operating leases as we believe this is the

only thing that would present a red flag for investors.

Undoing Accounting Distortions

Undoing and manipulating accounting policies is when someone takes an

account or accounts that could make a difference in an investors or just an

everyday person’s opinion on the worth of a company and restating them so that

they reflect the true worth of the company. After restating these amounts this

lets potential investors see if they want to invest in the company or not after

reviewing the new more reliable financial statements. After reviewing Green

Plains’ financial statements there was one account that we believed needed to be

restated in order to present a true value for the company. The account we

decided to restate was operating leases. We restated operating leases for Green

Plains because that had not yet been capitalized. Although Green Plains

operating leases do not present a huge amount of liabilities, we decided that

they were material enough to be restated because they also have a significant

ability to reduce net income.

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Operating Leases

Operating leases are presented on many company’s 10k’s but they don’t

show up on the balance sheet or the income statement because they are said to

be considered temporary assets. We decided Green Plains operating leases are

large enough, approximately 21%, to be seen as important and needs to be

restated on the financial statements. Rules and regulations under Generally

Accepted Accounting Principles (GAAP) do not require operating leases to be

capitalized so Green Plains is using this as an advantage for their company by

understating their liabilities. To show a more accurate image of Green Plains

financial statements we capitalized operating leases in the best way we see fit

given the information we acquired off of Green Plains 10K. First we had to find

the discount rate to use in order to capitalize the operating leases. We did this by

finding the Corporate and the Agribusiness borrowing rates, adding them

together, and then finding the mean. Below are the graphs and calculations we

came up with for capitalization of the operating leases, in which Green Plains

would show on their financial statements if they were capitalized.

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When restating the balance sheet for operating leases, the asset account

Capitalized Operating Leases Rights must be increased (debited) and the liability

account Capitalized Operating Lease Liabilities must be increased (credited) by

the present value of operating leases for the year. Adjustments must also be

made to the retained earning account based on the effect that operating leases

has on the income statement. Interest as well as depreciation are used by the

company to increase its expenses on the on the next years income statement.

The payment amount on operating leases is removed from the account rent

expense to show that the operating leases bad been capitalized from the

beginning of the year.

Goodwill

Goodwill is an intangible asset on the books of most companies that buy

other companies for a larger amount than what the company was really worth.

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Goodwill would be classified as a competitive advantage that results when a

company buys another company and is presented as an intangible asset on the

balance sheet. Green Plains states in their 10-K what their goodwill consist of

and exactly how they impair their goodwill over the life of the entity. “The

Company’s goodwill currently is comprised of amounts relating to its acquisitions

of Green Plains Ord, Green Plains Central City, Green Plains Holdings II, Green

Plains Otter Tail and BlendStar”. (10-K). Green Plains hasn’t acquired any new

companies over the years being evaluated and has goodwill that is less than

20% of the company’s property, plant, and equipment so we have decided that it

is not necessary to restate goodwill on the financial statements.

Financial Statements

A company’s financial statements are a complete representation of the

performance of the company as a whole. Though there are laws and regulations

regarding what most companies can and cannot report on their financial

statements, there are still a few items presented on it that a company can

manipulate in order to show better performance over a span of time. To show

investors and others concerned with the dealings of Green Plains we have

restated the balance sheet and income statement for the years of 2010-2014.

The adjustment we made between the original statements given by Green Plains

and the restatements are for amortizing operating leases as described above.

Goodwill and Research and Development are two other items on the financial

statements that can be misrepresented but for Green Plains Goodwill did not

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change over the stated years and is less than 20% of plant, property, and

equipment. Research and Development is such a small expense to the company

that we did not feel the need to restate it on the income statement.

Balance Sheet

The balance sheet is a financial record of all the permanent asset, liability,

and stockholder equity accounts. These accounts balances show the company’s

financial position at a certain point in time. Below we restated some of the

balance sheet accounts such as operating leases over the years of 2014-10 in

order to show a more factual representation to future investors of Green Plains’

balance sheet. There was no need for a re-stated income statement, because it

was no effected.

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Conclusion

After reviewing all the financial information and restating the balance

sheet for operating leases by increasing their liabilities, we now believe that

Green Plains balance sheet shows a more realist view to investors as to how to

company is doing financially.

Financial Analysis

In order to determine the Green Plains Inc.’s value, we must do financial

analysis. In financial analysis, we will take a comprehensive look across many

valuable ratios. These ratios include, insight into a company’s liquidity, operating

efficiency, profitability and a firms capital structure. Comparing these ratios of

Green Plains Inc. and the rest of the industry will help determine if there is any

market segmentation.

Liquidity ratios are important to understand, because the ratios paint a

picture of how easily the firm can meet debt obligations. A very important

aspect, because it demonstrates the risk of the firm going bankrupt and what

type of return a investor should expect.

Operating efficiency ratios measure how efficient the company is across all

operations. If operating efficiencies are low, then there is excessive costs that

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can be eliminated and increase profits. Operating efficiency rations also can

demonstrate how well management is managing the business.

Profitability ratios measure a firm’s ability to generate profits in excess of

costs. A lot the profitability ratios revolve around margins and the yield the

company receives on producing products and services. Higher margins are

preferred.

Capital structure ratios identify how the company is financing its

operations. There are two types of financing options; one is through credit or

bank loans. Financing through credit can be dangerous if highly leveraged

because the principal and interest must be repaid, unlike equity financing in

which there aren’t any interest payments and principals do not have to be

repaid.

Cross Sectional (Benchmark) Analysis:

Ratio Cross sectional analysis allows evaluating Green Plains’ efficiency

amongst its competitors. In the following section, we will begin to compare ratios

of liquidity, operating efficiency, profitability, and capital structure and leverage

risk to see how Green Plains compares to its competitors. Green Plains’ main

competitors include Valero, Archer-Daniels Midland and Future Fuel. Followed are

Green Plains’ competitor’s ratios. By comparing these ratios to Green Plains, we

will be able to get a better understanding of how they stand amongst the

industry.

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Liquidity Ratios

Liquidity is a very important part for any company and is valuable to

measure. The main reason for a company to keep up with its liquidity is that they

need enough cash on hand to pay its bills as they become due. Current and

quick ratios are the most commonly used to determine the liquidity of a

company. The variables of the ratios are from the balance sheet. We will use

current assets, current liabilities, and inventory to calculate the liquidity. Because

our restatements only included operating leases, no liquidity ratios were affected.

In the ethanol industry, knowing the liquidity of a firm is important

because of the uncertainty and fluctuation of past years sales in the industry.

With new regulation taking place in recent years, companies such as Green

Plains have needed to maintain higher liquidity ratios in order to remain safe.

Current Ratio

The cash on hand and the assets that can be turned into cash in less than

a year are defined as current assets. Current liabilities are the financial debts

that the company owes within a year. To calculate the current ratio, we took

current assets over current liabilities. From this ratio, we can measure the

different companies’ ability to pay short-term debt.

When observing the companies, Valero had the lowest current ratio, while

Future Fuel had the highest out of the companies evaluated. Green Plains

followed similar trends with Valero and Archer Daniels Midland, while Future Fuel

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had a much higher current ratio. From the graph below, one can see the

segmentation that exists within the industry.

Quick Ratio

The quick ratio is another important ratio when determining the safety net

a company has. Much like the current ratio, the quick ratio takes into account

current assets and current liabilities, however it disregards inventories. To get

the quick ratio we subtracted inventory from the current assets and then divide

by current liabilities. Inventory is not considered very liquid, therefore this ratio

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helps us better see how much of the other current assets a company will have to

satisfy their debts within that year.

As observed in the following graph, Archer-Daniels-Midland had the lowest

quick ratio and Future Fuel had the highest. Much like the current ratio, Green

plains compares much similarly to Valero and Archer-Daniels Midland. Although

Green Plains is doing about the same, this still could become an issue if liabilities

grew much more. Similar to the current ratio, one can see that segmentation

exists in the industry from the difference in Future Fuel. This can be explained by

the large size difference between Future Fuel and the other companies it is

compared to. Because it is a much smaller company, the firm remains more

liquid because of more uncertainty than its’ large and established rivalries.

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Conclusion

As mentioned earlier, Green Plain’s liquidity ratios show trends very similar

to both Valero and Archer-Daniels Midland. Overall, Green Plains had the second

highest quick ratio average and third highest current ratio average. We can

conclude that Green Plains has more current assets in other categories than in

inventory. This is a competitive advantage because inventory is typically harder

to turn quickly into cash. In 2014, Green Plains had a quick ratio of 1.28, which

means that for every $1.00 of current debt, they have $1.28 to cover it. The

ethanol industry remains uncertain at times, so being liquid remains an important

factor for the industry. With Green Plains having a quick ratio remaining close to

1 in prior years, the company may not be viewed as the safest company.

Inventory Turnover

Inventory turnover measures the period of time of how quickly a firm sells

inventory. The inventory turnover ratio is calculated by dividing costs of goods

sold by inventory. Higher ratios indicate that a firm is selling more products and

services and demonstrates firm health. Low ratios indicate that inventory is

sitting and not being sold quickly, tying up capital and is being exposed to

depreciation. These ratios are important to understand when valuing a firm due

to the fact that it demonstrates how successfully a company operates and drives

value.

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After analyzing the graphs, there appears to be two areas of market

segmentation. Green Plains is in the upper bounds with a higher inventory

turnover ratio with Valero. On the other hand there is a lower bound with ADM

and Future Fuels. ADM and Future Fuels appear to be more stable than Green

Plains Inc. Green Plains inventory turnover peeked in 2012 and have significantly

decreased heading for the lower bound segmentation. This is troubling news

considering the rest of the market is not following Green Plains Inc. trend of

decreasing inventory turnover. This leads us to believe that the issue could lie

within the company’s management.

2010 2011 2012 2013 2014

Green Plains 10.72 14.76 19.65 18.11 11.22

ADM 7.52 7.77 6.28 6.8 7.34

Valero 15.99 22.74 22.76 22.44 19.79

Future Fuels 4.543 6.645 6.67 6.87 4.7

-

5.00

10.00

15.00

20.00

25.00A

xis

Tit

le

Inventory Turnover

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Accounts Receivable Turnover

Accounts Receivable Turnover is computed by dividing total sales by the

accounts receivable for the same year. This ratio measures how many times a

company collects its accounts receivable a year. A company wants a high

accounts receivable turnover ratio because that means that they are collecting

their accounts receivable often. The graph below displays how Green Plains does

the best job in collecting accounts receivable compared to the other companies

compared in the industry.

2010 2011 2012 2013 2014

Green Plains 22.22 31.84 41.97 26.85 20.72

ADM 9.18 10.12 26.25 26.91 27.4

Valero 19.68 18.96 16.67 16.58 18.53

Future Fuels 6.23 8.568 14.87 15.217 6.039

0

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Accounts Receivable Turnover

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Working Capital Turnover

The working capital ratio demonstrates the ease at which the firm

maintains and grows sales with investments. The working capital ratio is

measured by dividing current assets by current liabilities. A higher ratio is

desirable because it is healthier for the business to have a higher degree of

assets over liabilities. We want to see a firm that is efficient with purchasing

assets while satisfying operating costs.

The Graph demonstrates that there is segmentation occurring amongst

Future Fuels and the rest of the industry. Future Fuels is maintaining a much

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2010 2011 2012 2013 2014

Ax

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Working Capital Turnover

Green Plains

ADM

Valero

Future Fuels

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higher working capital ratio. Green Plains Inc. is segmented with the rest of the

industry following their trends similar. From the graph, it is determined that

Green Plains is more productive with its working capital to growth sales.

Day Supply Inventory

Day supply inventory measures the period of time required to turn

inventory into revenue. The converting of inventory to revenue is also the first

step in the cash to cash cycle. Day supply inventory is calculated by dividing

inventory by cost of goods sold and then finally multiplying by 365 days. The end

result is the number of days it takes to turn inventory over to revenue. The day

supply inventory is an efficiency ratio that demonstrates how effect a firm is in

turning inventory into revenues. Day supply inventory can be compared to other

companies and industries benchmarks to gauge the efficiency of the valuing firm.

Day supply inventory is also an important ratio because it displays how long a

firm’s capital is being tied up in inventory.

From looking at the graph, we noticed two areas of market segmentation.

Green Plains Inc. has on average the second lowest day supply inventory and

they parallel Valero closely, which are part of the lower bound segmentation.

The upper bound segmentation occurs with Future Fuels and Archer Daniels

Midland. Those two companies average 50 days to 80 day supply inventory vs.

Green Plains Inc. and Valero average 20 days to 35 day supply inventory. Future

Fuels, Archer Daniels Midland and Green Plains Inc. are better comparison than

Valero due to the fact that Valero does a large percentage of their revenue

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through other revenue streams rather than ethanol. Based off of that

information, Green Plains has a significantly better day supply inventory than

Future Fuels and Archer Daniels Midland. The graph also demonstrates that

Green Plains is more efficient in not keeping their capital tied up in inventory.

This could be explained due to the fact that Green Plains Inc. has a high debt to

equity ratio and is needs to keep liquidity in check to pay obligations on debt.

The current trend throughout the industry is increasing day supply inventory.

Below is a graph of Green Plains and its competitor’s day supply inventory.

Days Sales Outstanding

The days sales outstanding is the second step in the cash to cash cycle

and measures the amount of time in days it takes to collect on their account

2010 2011 2012 2013 2014

Green Plains 24.54 22.34 21.66 21.02 26.36

ADM 48.57 46.99 58.09 53.69 49.7

Valero 22.83 16.05 16.04 16.26 18.44

Future Fuels 22.84 23.68 21.55 24.07 23.89

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Days Supply Inventory

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receivables. Essentially, the day sales outstanding ratio demonstrates how

efficient a company is in collecting receivables. The day sales outstanding can

shed some light on the type of customers that a company sells to, the credit

requirements a company has on customers purchasing their product, and the

effect on cash flows. Day sales outstanding is calculated by dividing accounts

receivable turnover by 365 days.

The graph demonstrates that Green Plains does a very good job in

collecting their receivables. Green Plains on average has the lowest day sales

outstanding. The graph also demonstrates a common trend of convergence

2010 2011 2012 2013 2014

Days Sales OutstandingGreen Plains Inc.

16.4 11.5 8.7 13.6 17.6

Days Sales OutstandingArcher Daniels Midland

39.74 36.05 13.91 13.56 13.32

Days Sales OutstandingValero

18.54 19.25 21.9 22.01 19.7

Days Sales OutstandingFuture Fuels

58.61 42.63 24.55 24 60.44

0

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among the industry to quicker collection times of accounts receivables. Green

Plains leads the industry due to the pressure of their need to stay liquid to pay

off debt obligations. The industry convergence move could also be attributed to

stricter credit terms for customers that help the industry collect receivables

quicker and at a higher rate.

Cash to Cash Cycle

The cash to cash cycle can be described as how fast a company can convert

cash. In order to calculate this ratio we took the day supply inventory plus days

sales outstanding. This ratio can be very valuable to most companies. Below is

the graph for the cash to cash cycle. Green Plains had a low cash to cash cycle

when compared to the rest of the industry. From 2010 to 2012 the cycle went

down and then rose from 2012 to 2014. Future Fuels was struggling with the

cash to cash cycle and never got close to becoming in the same realm as the

other companies.

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Profitability Ratios

Probabilities ratios are an important measure companies can use to

compare its earnings compared to its expenses and other costs during a specific

time. More than any other accounting measure, a firm’s profits demonstrate how

well its management is making investment and financing decisions (17). Having

a higher value compared to other competitor’s ratios in the industry is an

indicator that the company is doing well financially and has a well-functioning

cost structure. In some instances, companies that have seasonal value, such as

retail, experience higher revenues in peak periods; however for Green Plains this

does not apply. Following are different probability ratios that were used to

compare the different companies in the ethanol industry.

2010 2011 2012 2013 2014

Green Plains 14.83 14.7 16.99 19.06 22.18

ADM 52.58 51.77 51.9 47.5 41.92

Valero 12.98 11.14 11.91 11.55 13.28

Future Fuels 19.57 20.67 19.88 21.2 23.33

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Gross Profit Margin

The gross profit margin shows us what percent of revenues will be left

over after the cost from sales has been deducted, as well as shows

managements effectiveness in allocating costs. Higher percentages mean that

company has more opportunity to pay for other expenses, such as labor and

operating costs. The ratio is found by taking the total revenues minus the cost of

goods sold over sales. Below is Green Plains’ gross profit margin compared to its

main competitors in the industry.

Aside from Future Fuel, there is little segmentation between the

companies, which may be caused by different processes in production of the

same product or different management structure. For the most part, each

company was able to keep a steady percentage between each year, except for

2010 2011 2012 2013 2014

Future Fuel 18.8% 20.3% 16.9% 23.0% 21.8%

Valero 4.64% 4.59% 5.24% 4.66% 6.36%

ADM 6.23% 5.33% 4.00% 4.33% 5.87%

Green Plains 7.1% 4.8% 2.8% 5.7% 11.6%

0.0%

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25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Gross Profit Margin

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Green Plains. As well as having the lowest gross profit margin out of all the

benchmark companies, they also had the most varied percentage from each

year. Reasons for this could be the rise in corn prices hitting Green Plains harder

than other competitors and increased difficulty in operating efficiency in 2012.

Operating Profit Margin

Operating profit margin, also known as net profit margin, measures how

profitable a company’s sales are after all operating expenses, including taxes and

interest, have been deducted (17). A company must have a positive margin in

order to be able to pay off its fixed costs. Green Plains again had the lowest

operating profit margin compared to all other competitors, with the trend of

Future Fuel leading the industries continues. 2012 also proves to be a year in

which all benchmark companies experience a drop and in this case knocking

Green Plains below 1%.

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Net Profit Margin

Net profit margin is calculated by taking net income divided by net sales.

This margin represents the total profits by the company, and allows them to

track the changes in ability to maintain financial growth or added value by their

sales. It is evident to see that Green Plains, only being founded in 2004 and

being a fairly new competitor in the industry, has a lower net profit margin than

the other companies, while it has the third highest growth rate from 2012 to

2014. In previous years Green Plains has experienced a drop in profit margin,

but indicators predict a rise as the years progress.

2010 2011 2012 2013 2014

Future Fuel 14.7% 16.9% 13.6% 20.7% 18.5%

Valero 2.28% 2.92% 2.88% 2.87% 4.51%

ADM 3.96% 3.33% 1.89% 2.08% 3.52%

Green Plains 3.1% 1.7% 0.7% 2.4% 7.7%

0.0%

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30.0%

35.0%

40.0%

Operating Profit Marins

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Return on Assets

The return on assets is measured by how much of the net income is

generated compared to a company’s total assets at the year beginning. It serves

as an indicator of how profitable the company is relative to its total assets. The

formula for calculating return on assets is net income over total assets. This ratio

is a key statistic, for it allows a company to make sure it is not only growing its

revenues, but its net income as well. Having a higher return on assets is not only

a sign of being more profitable, but also proves to be favorable for investors.

Below is the comparison between Green Plains’ benchmark companies. Green

Plains ROA serves to be the lowest compared to its competitors over most years,

2010 2011 2012 2013 2014

Future Fuel 10.5% 11.3% 10.1% 17.0% 17.6%

Valero 0.39% 1.66% 1.50% 1.97% 2.77%

ADM 3.13% 2.52% 1.52% 1.49% 2.77%

Green Plains 2.3% 1.1% 0.3% 1.4% 4.9%

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30.0%

Net Profit Margin

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and even lower after restatements. This causes us to question if net income is

growing steadily along with Green Plains’ revenues.

Return on Equity

The rate of return a company earns on stockholder’s equity is known as

return on equity. We calculated the rate by dividing the year’s beginning

stockholder’s equity by the net income. Companies can use this to determine

how much they used equity to gain revenues.

In the ethanol industry the return on equity can change a lot from year to

year based on how much net income and equity fluctuate. Over the span of the

2010 2011 2012 2013 2014

Green Plains 3.45 2.68 0.86 2.93 8.98

ADM 6.11 5.52 3.05 3.02 5.12

Valero 0.88 5.2 4.77 5.93 7.82

Future Fuels 6.7 9 9.7 17.9 11.5

GP Re-stated 3.2 1.53 0.86 2.83 8.64

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Return on Assets

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five years we evaluated the industry, Green Plains had the lowest and highest

ratio. In 2012 every company had the lowest ratios for their company in the five

years. This makes sense because in 2012 the ethanol industry experienced a

down year with corn prices at a high and not as much demand. For example,

Green Plains had a ratio of 2.37. In 2014 Green Plains was at a high with 23.76.

Asset Turnover

The Asset Turnover ratio is an indicator of the efficiency with which a

company is deploying its assets. Asset Turnover can be found by dividing total

sales by total assets. The higher the asset turnover the better for the company,

meaning that it has more revenues per dollar of assets. For the first year, each

company’s asset turnover ratio is increasing steadily. Then the trend for each

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company, with the exception of Future Fuel, is that their ratios begin to steadily

decline over the years 2011-2014. This means that they are starting to get less

money per dollar of assets, which is not a good sign. Because Green Plains

restatements affect total assets, the asset turnover is affected and is lower in

most years excluding 2012, though not as low as Future Fuel. This is caused

mainly because of 2012’s higher asset amount due to the uncertainty of the year

because of higher corn prices and drought, as well as a decrease in sales.

Capital Structure and Leverage Risk Ratios:

Capital structure refers to the way a company finances its assets using a

combination of debt and equity. The capital structure ratios show how a firm

finances the purchase of its assets (16).

2010 2011 2012 2013 2014

Green Plains 2.54 2.45 2.25 2.11

ADM 1.95 2.19 2.01 2.02 1.85

Valero 2.25 3.13 3.19 3.01 2.82

Future Fuels 0.6 0.8 1.0 1.1 0.7

GP Re-Stated 1.42 1.42 2.53 1.98 1.75

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Debt to Equity

The debt to equity ratio measures total liabilities to total equity identifying

the liquidity of the firm. Through this ratio we can identify the breakdown of the

financing activities of the firm. Specifically, if the firm is financing their endeavors

through creditors (bank loans), then the debt to equity ratio will be higher. If the

firm is financing their project from shareholders however, then the debt to equity

ratio will be lower. Companies that are utilizing bank loans for financing activities

are engaged in the process of leveraging. Leverage can be expensive, due to

interest payments, and the debt must be repaid unlike equity financing. A lower

debt to equity ratio usually indicates a more stable business. Different industries

generally have different debt to equity ratio benchmarks, so it is important to

identify those key numbers and compare the companies to the rest of the

industry, as well as recognize if there is any segmentation within the industry

additionally.

2010 2011 2012 2013 2014

Green Plains 1.81 1.81 1.75 1.81 1.29

ADM 0.47 0.44 0.34 0.27 0.28

Valero 0.5 0.41 0.36 0.32 0.28

Future Fuels 0.36 0.34 0.37 0.26 0.29

GP Re-stated 2.01 2.9 1.86 1.81 1.29

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Debt to Equity

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After first glance at the debt to equity graph, there is clear market

segmentation between Green Plains Inc. and the rest of the industry. Green

Plains Inc. averages a debt to equity ratio four to five times higher than the rest

of the industry. The high debt to ratio indicates that Green Plains Inc. uses a

high degree of leverage compared to the rest of the industry, thus as an investor

we would demand a much higher rate of return. The high debt to equity ratio

compared to the rest of the industry raises concerns of the longevity of the

Green Plains Inc. due to interest and the principle that needs to be paid.

The rest of the industry is following a pattern of a decreasing debt to

equity ratio, while Green Plains Inc. remained unchanged until 2014. In 2014

Green Plains Inc. experienced a sharp decrease in their debt to equity ratio due

to significant increases in equities. In Green Plains Inc.’s 10-K it states that in the

future Green Plains Inc. will start to finance purchase of assets through the

issuance of equity securities rather than through creditors, but it in doing so will

also dilute the shareholders equity. The management has recognized that is

willing to take actions to improve their liquidity.

Altman’s Z-Score

Altman’s Z-Score takes 5 different equations or ratios added up to

compute. The equations we use are, (Working Capital/Total Assets) + (Retained

Earnings/Total Assets) + (EBIT/Total Assets) + (MVE/BVL) + (Sales

Revenue/Total Assets). We add up all 5 of these ratios for all the companies we

are benchmarking against in the industry and that gives us the Altman’s Z-Score.

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For the most part, each of these companies is safe from bankruptcy.

Future Fuels and Green Plains look to have the lowest numbers but this is

nothing to be worried about seeing that it only puts them in the gray area. Both

Green Plains and Green Plains re-stated are in no danger of bankruptcy in the

near future.

Financial Forecasting

When forecasting financial statements such as the income statement, the

balance sheet, and cash flows, trends, ratios, and assumptions are used to

calculate or estimate future balances for each of the financial statements

2010 2011 2012 2013 2014

Green Plains 2.21 3.02 3.11 2.68 3.00

ADM 3.2 3.84 3.3 3.3 3.04

Valero 3.00 3.83 4.11 3.92

Future Fuels 1.68 2.36 2.65 3.43 2.7

GP Re-Stated 1.95 1.81 3.48 2.49 2.29

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referred to above. This information is important for understanding the intrinsic

value of the firm. The most important forecast are the short term forecast

because one dollar today is worth more than one dollar in the future. The short

term forecast will have a greater impact on the company’s future. These are also

most important because the long-term forecasting is based off the first couple of

year’s trends. When forecasting we looked at Green Plains statements for the

last 5 years and used those numbers to forecast out ten years past the current

year 2014.

Income Statement

We started with the income statement by forecasting sales growth.

According to Scott Erwin of the University of Illinois’ department of agricultural

and consumer economics, “The focus on the changing profit outlook of ethanol

produces can obscure the fact that the industry is also coming off the best year it

has ever had in terms of profitability.” While the future of ethanol is facing an

uncertain future as the political battles about its usefulness continue, last year

most U.S. ethanol producers were swimming in profits like they have never

experienced (17).

After researching the industry, we used logical assumption to predict the

sales growth over the next ten years based on the previous 5 year increasing

trend in sales growth. We believe Green Plains’ sales peaked in 2014 but will not

be able to continue growing at such a high rate. 2014’s high profits were a result

of high ethanol prices, as well as relatively low corn prices. As a result we

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forecasted out our sales growth conservatively to increase by 6.75% in 2015

followed by 7% in 2016 and similar trend for the next 8 years.

After projecting the sales growth over the next 10 years, we created a

common sized income statement by taking each line item on the income

statement and dividing it by total sales from that year. By looking at the common

sized statement, it is easier to depict trends within the company and use that as

a basis for future percentages. From here we could see that Green Plains cost of

goods sold increased from 2010 to 2012 and then slowly began to decrease.

When forecasting we decided to keep within this range, with cost of goods sold

at 94% in 2015 and 93.5% in 2016. Until better technology is developed and

there is a better solution to ethanol production we expect cost to stay about the

same. When looking at total operating expenses there was a slight increase in

2012 most likely caused by higher corn prices due to a drought that year. When

forecasting out the next ten years, we decided to keep expenses within the 2 to

5% range like the previous 5 years. Since the only item that needed to be

restated for Green Plains in order to show a more realistic image of the company

was operating leases, which only touch the balance sheet in the form of non-

current assets and non-current liabilities, there was no reason for us to restate

any amounts on the income statement. Both Green Plains forecasted income

statement and common size income statement are stated below.

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Dividends Forecasting

Green Plains began paying dividends in 2013 with a dividend payout of 4

cents per share paid out in November of 2013 and in September of 2013. In

February of 2014 and May 2014, Green Plains again paid a dividend of 4 cents

per share. Their dividends increased 50% to 8 cents per share in mid 2014,

when they paid an 8-cent dividend in August of 2014 and again in November.

The first quarter of 2015 had dividends of 8 cents and we expected the last two

quarters to remain the same. As a result of Green Plains’ strong sales growth

forecast, the dividends paid for each year grew from 8 cents a share in 2014 up

to 28 cents a share in 2024. With our forecasted dividends, we multiplied this by

our shares outstanding (about 37 and a half million) in order to forecast our

retained earnings.

Balance Sheet

After forecasting the income statement we found a trend in Green Plains’

asset turnover over the past 5 years and found that it had been decreasing at a

steady rate and used it to forecast out the next 10 years. We forecasted that the

asset turnover ratio would follow the current trend and decrease from 2.11 in

2014 to 2.05 in 2015. Using the forecasted asset turnover ratios and our

forecasted percentages for current and non-current assets, we were able to find

our total assets. We expect the cash and accounts receivable to remain within

similar percentages as the previous five years. Non-current assets are expected

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to also remain within the 50 to 60% with goodwill staying within 2 to 3% and

property, plant and equipment within the 50 to 55% range. We believe this to be

true because no information was presented relaying any news of requiring new

plants. Green Plains accounts receivable seemed to have no trend from 2010 to

2014, which makes it hard to draw a conclusion for its next 10 years. Using the

inventory turnover ratio we can forecast out inventory for Green Plains’ balance

sheet. Over the past 5 years, Green Plains’ inventory turnover has ranged from

10.7 to 19.65. We expect Green Plains to stay within this range for the following

10 years.

After forecasting assets for Green Plains, we next began to forecast total

stockholder’s equity. When forecasting stockholders equity, we used the IGR

method and assumed that no new shares would be sold and no new treasury

stock would be acquired. For this reason the only thing that would change is

Green Plains retained earnings. Retained earnings was forecasted by taking the

previous years retained earnings, plus or minus net income or net loss, and

subtracting out dividends paid for the current year. After finding stockholders

equity we were then lastly able to find liabilities on the balance sheet by

subtracting total assets from stockholders equity, and use our current ratio to

distinguish between current and non-current liabilities. Below our Green Plains

forecasted balance sheet and common size balance sheet.

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Statement of Cash Flows

The last part of the financial statement forecasting is the statement of

cash flows. For this section we forecasted operating activities as well as investing

activities. To find the estimate in operating activities we first compared our cash

flows from operations to sales, operating income, as well as net income, to find

which ratio had had the most stability. We found that all of the comparisons had

outliers (indicated in the yellow cells), but that cash flows from operations

compared to operating income had the most reliable trend. We used the average

of the past five years to then forecast out the next 10 years of our operating

cash flows. Next, forecasts of cash flows from investing activities were found by

finding trends within Green Plains’ net current assets from the past five years.

We also found that capital expenditures as a percentage of sales range from .77

to 1.84 for years 2010 to 2014. By finding our cash flows from operating and

investing activities, we added them together to find our free cash flow, in which

we are able to use in our valuation models.

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Cost of Capital Estimation

To estimate Green Plains’ cost of capital, we will calculate their weighted

average cost of capital (WACC). This is the average rate a company is to pay out

to its security holders to finance its assets. With all else remaining constant,

WACC increases as the beta and rate of return on equity increases. With an

increase in WACC, there is also a decrease in valuation as well as a higher risk.

Cost of Debt

The cost of debt is the effective interest rate that a company pays on its

current debt obligations. Cost of debt can be measured on a before tax basis or

after tax basis, which is the most common due to the fact that interest expense

is deductible. There is a positive correlation between the cost of debt and the

associated risk. Green Plains Inc. provided a weighted average interest rate in

their 10-K, which they stated as 6.50%. The interest rate provided will be used

to calculate as stated and restated financials.

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Weight = LT debt or capitalized / total

A weight was assigned to Green Plains Inc.’s capitalized operating leases

and long term debt that was derived from the total of the two components. We

then multiplied the two categories weights by their interest rates to get the

weighted average cost of debt for Green Plains Inc. After restating the

financials, we observed that the weighted average cost of debt was slightly less

than the stated weighted average cost of debt with 6.13% vs. 6.50%. Ultimately

the slight deviation signifies that Green Plains is slightly less risky than originally

presented.

Cost of Equity

The cost of equity is measured by using the capital asset pricing model,

otherwise known as CAPM. The formula for CAPM is the risk free rate (Rf) plus

cost of debt (as stated) Amount Rate Weight W*R

LT debt 399440 6.50% 100% 6.50%

Cost of Debt (restated) Amount Rate Weight W*R

LT Debt 399440 6.50% 88.12% 5.73%

Capitalized OL 53843 3.37% 11.88% 0.40%

Total 453283

6.13%

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the systematic risk (beta) multiplied by the market rate premium (mrp). Also

with what we are doing we included a size premium (SP), which is just added to

the CAPM formula. We called this the 2-factor cost of equity.

Ke = Rf + beta ( mrp) + SP

In our analysis we took regressions from 10 years, 7 years, 2 years, 1

year, and 3 months. Each time frame we broke it down into 72, 60, 48, 36, and

24 months to help get a better feel and more data to go off of.

In order to find each one of these variables we take different approaches.

First, the risk free rate is based off the Treasury bond’s yields for 3 months, 1-

year, 2-years, 7 years, and 10 years. In order to find the numbers for each of

those we went to the St. Louis Fed Reserve website. After we found these

numbers we then converted them into a monthly rate instead of the yearly rate

that it was given.

After we found the risk free rate for each month we then found the

market rate premium by subtracting the risk free rate by the S&P 500 returns

from each month. Once we calculated the market rate premium for the months

we then ran regression analysis’ using the monthly return as our X variable and

the market rate premium as our Y variable. The regressions give us our betas

that we use in the CAPM formula. The regressions also give us the 95% limits for

the beta as well as an adjusted R-squared. The adjusted R-squared is used to tell

how much systematic and unsystematic risk is involved in Green Plains. We

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found that Green Plains has a lot more unsystematic risk, which means a lot of

the risk is firm specific.

Now that we have the information needed, we can calculate the cost of

equity for the different amount years and regressions. Also we could calculate

the 2-factor cost of equity by just simply adding the size premium to cost of

equity. We determined the size premium was 1.7% based out of the Business

Valuation textbook. We got 1.7% based off that Green Plains was just past the

6th size decile.

Size Decile

Market Value

of Largest

Company

Percent of Market

Represented by

Decile

Avg. Annual

Stock ReturnBeta Size Premium

1 – smallest 235.6 1 21 1.41 6.4

2 477.5 1.3 17.2 1.35 2.9

3 771.8 1.7 16.5 1.3 2.7

4 1,212.30 2.2 15.4 1.24 1.9

5 1,776.00 2.6 15 1.19 1.8

6 2,509.20 3.5 14.8 1.16 1.8

7 3,711.00 4.3 13.9 1.12 1.2

8 6,793.90 7.4 13.6 1.1 1

9 15,079.50 13.6 12.9 1.03 0.8

10 – largest 314,622.60 62.3 10.9 0.91 -0.4

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We decided to go with the 60 months in the 10 year regression because it

is tied for the highest adjusted R-squared. The reason for this is because it

shows that it measures more systematic risk (market risk) than any other

regression. As a result, we will use a beta of 1.25 with an upper bound of 2.17

and a lower bound of .33 with a confidence level of 95%. Yahoo has Green

Plains’ beta at 1.10 as of April 8th 2015. Obviously our beta is higher but Yahoo’s

beta is still within our confidence level. With that being said we conclude that we

think Green Plains is a little more risky than what Yahoo has.

Months Beta Beta LB Beta UB R^2 MRP RF Ke SP 2 Factor Ke LB Ke UB

72 1.29 0.15 2.42 5.40% 8% 2% 12.32% 1.7% 14.02% 4.90% 23.06%

60 1.25 0.33 2.17 9.80% 8% 2% 12.00% 1.7% 13.70% 6.34% 21.06%

48 1.18 -0.04 2.41 5.60% 8% 2% 11.44% 1.7% 13.14% 3.38% 22.98%

36 0.91 -0.94 2.75 -0.02% 8% 2% 9.28% 1.7% 10.98% -3.82% 25.70%

24 1.23 -0.9 3.35 1.80% 8% 2% 11.84% 1.7% 13.54% -3.50% 30.50%


72 1.29 0.15 2.42 5.50% 8% 2% 12.32% 1.7% 14.02% 4.900% 23.06%

60 1.25 0.33 2.17 9.80% 8% 2% 12.00% 1.7% 13.70% 6.340% 21.06%

48 1.18 -0.04 2.41 5.60% 8% 2% 11.44% 1.7% 13.14% 3.380% 22.98%

36 0.91 -0.94 2.75 -0.01% 8% 2% 9.28% 1.7% 10.98% -3.820% 25.70%

24 1.23 -0.9 3.35 1.90% 8% 2% 11.84% 1.7% 13.54% -3.500% 30.50%


72 1.29 0.16 2.45 5.50% 8% 2% 12.32% 1.7% 14.02% 4.98% 23.300%

60 1.25 0.33 2.17 9.90% 8% 2% 12.00% 1.7% 13.70% 6.34% 21.060%

48 1.18 -0.04 2.41 5.60% 8% 2% 11.44% 1.7% 13.14% 3.38% 22.980%

36 0.91 -0.94 2.76 -0.01% 8% 2% 9.28% 1.7% 10.98% -3.82% 25.780%

24 1.23 -0.89 3.35 1.90% 8% 2% 11.84% 1.7% 13.54% -3.42% 30.500%


72 1.29 0.16 2.43 5.60% 8% 2% 12.32% 1.7% 14.02% 4.98% 23.14%

60 1.25 0.34 2.17 9.90% 8% 2% 12.00% 1.7% 13.70% 6.42% 21.06%

48 1.18 -0.04 2.41 5.60% 8% 2% 11.44% 1.7% 13.14% 3.38% 22.98%

36 0.91 -0.94 2.75 -0.01% 8% 2% 9.28% 1.7% 10.98% -3.82% 25.70%

24 1.23 -0.89 3.36 1.90% 8% 2% 11.84% 1.7% 13.54% -3.42% 30.58%


72 1.29 0.16 2.42 5.60% 8% 2% 12.32% 1.7% 14.02% 4.98% 23.06%

60 1.25 0.33 2.17 9.90% 8% 2% 12.00% 1.7% 13.70% 6.34% 21.06%

48 1.18 -0.04 2.41 5.60% 8% 2% 11.44% 1.7% 13.14% 3.38% 22.98%

36 0.9 -0.94 2.75 -0.03% 8% 2% 9.20% 1.7% 10.90% -3.82% 25.70%

24 1.22 -0.9 3.36 1.80% 8% 2% 11.76% 1.7% 13.46% -3.50% 30.58%

3 Month Regression

1 Year Regression

2 Year Regression

7 Year Regression

10 Year Regression

115

After adjusting for the size premium, we will use 13.7% for the cost of

equity. Some people like to think of cost of equity as the required rate of return.

In other words, an investor should buy into Green Plains if they do not think they

will earn 13.7%. Green Plains can expect with 95% confidence that the cost of

equity will be in between 6.34% and 21.06%.

Backdoor Cost of Equity

The backdoor cost of equity is another way to find the equity without

using the CAPM. Instead we took the price to book, return on equity, and the

internal growth rate to plus into our formula. This allows us to not just use the

historical data to get a cost of equity.

Price/Book = 1 + ((ROE + Ke)/(Ke-g))

We found that Green Plains had the following values for each of the

ratios.

1.47 = 1 + ((.238 + Ke)/(Ke-.087))

The formula calculates that the cost of equity (Ke) to be 18.97%.

However this is a good way to find cost of equity for some companies, we

believed that this was not for Green Plains. As a group we concluded that the

more reasonable cost of equity for our valuation was the one we found by using

the CAPM.

116

Weighted Average Cost of Capital (WACC)

The weighted average cost of capital can be explained as the rate at

which Green Plains can finance their operations in the company by debt and

equity. In order to calculate the WACC we multiply the proportion of debt or

equity by their individual costs. After we add these two numbers together we get

what is called the overall cost of capital for Green Plains. In the graphs below we

have the stated and the restated WACC for Green Plains.

In order to get the market value of equity we took the total fair value of

assets minus the total fair value of liabilities. We got the market value of

liabilities from Green Plains 10-K. After we got the market values we then

preceded to put them in proportions based off the firms value. The firm’s value is

the market value of liabilities plus the market value of equity. For the rates that

we used we got 6.5% from the 10-K and 13.7% from our cost of equity. Once

we multiplied the rates times the weights we then added up the totals for equity

and debt to 9.41% WACC restated after tax. The tax rate is 28.90% for Green

Plains and we found that in the 10-K. The difference in between the as-stated

and restated WACCs was the capitalized operating leases. We do not have that

much of capitalized operating leases so it did not make too much of a difference

in our WACCs. Sometimes the WACC can be unreliable so we took the lower and

upper bounds for equity found in the regression to come up with a range that

the WACC can fall in with a 95% confidence.

117

WACC (as stated) Amount Weight Rate W*R

Market Value of Liabilities 399440 44.41% 6.50% 2.89%

Market Vaule of Equity 500049 55.39% 3.37% 1.87%

WACC 4.76%

Firm Value 899489 WACC after tax 3.93%

tax rate 28.90%

WACC (restated) Amount Weight Rate Weight*Rate

Market value of liabilities 453283 47.54% 6.50% 3.09%

Market value of equity 500049 52.66% 13.70% 7.21%

WACC 10.30%

WACC after tax 9.41%

Firm value 953332 Tax Rate 28.90%

WACC LB (restated) Amount Weight Rate Weight*Rate


Market value of equity 500049 52.6%6 6.34% 3.34%

WACC 6.43%


Firm value 953332 tax rate 28.90%

WACC UB (restated) Amount Weight Rate Weight*Rate



WACC 14.18%


Firm value 953332 Tax rate 28.90%

118

Using this data we can conclude that Green Plains’ cost of capital will be in

between 5.54% and 13.29% after tax with 95% confidence.

Valuation Analysis

The valuation analysis is the last step in our evaluation of Green Plains

and what we consider the most important part. The intrinsic valuation and the

market comparative valuation are the two methods we decided to use in order to

see if Green Plains is undervalued, fairly-valued, or overvalued. As analysts we

wanted to find the price per share for Green Plains. After using both methods we

decided that the most important method is the intrinsic valuation method

because there is not as much room for error as the market comparative

valuation. Also we concluded that the market shows that Green Plains is

undervalued but that our calculations based on the intrinsic models shows that it

is overvalued.

Market Comparative Evaluation

The market comparative evaluation is composed of trailing P/E, Forward

P/E, Price to Book, Price Earnings Growth, P/EBITDA, and the EV/EBITDA

multiples. We considered ourselves as 10% analysts while valuing the Green

Plains. The numbers that we used for the Green Plains and the industry came

from May 1st, 2015. After we calculated all of the multiples by using the average

of the industry, we realized that they all fluctuated in price per share by a good

amount. The one thing that mostly remained the same was that they showed

119

that Green Plains was undervalued with a few exceptions. This evaluation

method is a good indicator but it has some room for error because we only used

three companies in the industry to get what we thought were fair values for

Green Plains.

Trailing P/E

The trailing price to earnings ratio tells us how many years or profits

Green Plains is paying for their stock. We started with taking the May 1st, 2015

closing share price and then dividing it by the earnings per share in the past year

for each company. After we did that, we then got the average of the ratios from

the companies in the industry without Green Plains. We then used the average of

the industry to come up with a new share price, $41.83. The actual price at May

1st, 2015 for Green Plains was $31.02 while we got $41.83 for the fair value. We

concluded that Green Plains is undervalued based on the trailing P/E multiple.

Ratio Market Value 5/1/2015 Should Sell for Value

Trailing P/E 31.02$ 41.88$ Undervalued

Forward P/E 31.02$ 47.08$ Undervalued

P/B 31.02$ 30.60$ Fairly Valued

PEG 31.02$ 31.70$ Fairly Valued

P/EBITDA 31.02$ 57.59$ Undervalued

EV/EBITDA 31.02$ 53.11$ Undervalued

Competitors P/E Results

Valero 8.6 Average 10.58

ADM 14.51 GP EPS 3.96

Future Fuel 8.62 Should Sell 41.88$

Value Undervalued

120

Forward P/E

The forward price to earnings ratio is like the trailing price to earnings

ratio but instead it uses forecasted years instead of previous years for the price

per share. Like the trailing ratio we calculate this by taking the price per share

over the earnings per share for the industry. We then used the average to get a

number that we believe is fair for Green Plains based off this multiple. Green

Plains should have a price per share of $47.08 when using the forward P/E

multiple. This number is not very accurate however because it is based on

forecasted price’s per share. We concluded that while using the forward P/E

ratio, Green Plains is undervalued as of May,1st 2015.

Price to Book Ratio

The price to book ratio is calculated by taking the price per share and

then dividing it by the book value per share. We found the book value per share

by taking the stockholder’s equity and then dividing it by the outstanding

common stock shares. If Green Plains had preferred stock then we would have

Competitors P/E Results


ADM 13.79 GP EPS 3.96


Value Undervalued

121

subtracted it from the stockholder’s equity before dividing it. The average price

to book ratio in the industry excluding Green Plains was 1.44. We then calculated

Green Plains’ price per share by multiplying that average by the book value

Green Plains had listed in its balance sheet. We came up with $30.60 price per

share, which would make it fairly valued when compared to the $31.02 as of

May, 1st 2015.

Dividends/ Price

When we were looking at the dividends between companies we noticed

that there was a big gap in between the dividends paid out by each company in

the industry. With a wide range of dividends we were not able to get an accurate

measurement of the value for Green Plains. We believe that this does not play a

big role at all in evaluating Green Plains because it is just one multiple out of

seven.

Compeitors P/B Results


ADM 1.59 GP BV Share 21.20


Value Fairly Valued

122

PEG

PEG stands for price earnings growth ratio. This ratio is calculated by

taking the P/E and dividing it by the internal growth rate. The numbers we found

were from the income statements and balance sheets of each company. We did

this for the industry besides Archer-Daniels-Midland because they were an

outsider when it came to the data. The reason for this is because they paid out a

lot more dividends in 2014 than the rest of the other companies. We were able

to get an average of .926 for the ratio and we then used that to calculate a good

number for the price per share for Green Plains. The growth rate that we used

was the restated internal growth rate that we found earlier of 8.64%. We can

conclude that Green Plains is fairly valued when using the PEG multiple.

P/EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and

amortization. We calculated the P/EBITDA by first multiplying the outstanding

shares and the price per share as of May, 1st 2015. This gives us the market

value of equity. Next, we just took the market value of equity and divided it by

Compeitors PEG Results


ADM -2.985596708 GP BV Share 3.96

Future Fuel 0.750217581 Growth Rate 8.64

Should Sell 31.70$

Value Fairly Valued

123

the EBITDA to give us our ratio for each company in the industry. When we

calculated the average ratio for the firm besides Green Plains, we ended up with

a ratio of 6.46 and then used that to get our price per share of $57.59. We

concluded again that Green Plains is undervalued based off this multiple.

EV/EBITDA

The EV/EBITDA is calculated by taking the enterprise value divided by the

EBITDA. The enterprise value is found by adding the liabilities minus the cash

and investments to the market cap. Again, we took the average of all the

companies EV/EBITDA and then used that to come up with a price per share for

Green Plains. We calculated that the price per share based on the EV/EBITDA

multiple is $53.11. We concluded that Green Plains is undervalued while using

this multiple since the actual price per share is at $31.02 as of May, 1st 2015.

Compeitors Mkt. Cap EBITDA P/EBITDA Results

Valero 30,280,000,000 7,590,000,000 3.988981159 Average 6.46

ADM 31,310,000,000 3,760,000,000 8.326764149 GP EBITDA 336140000.00

Future Fuel 459,960,000 65,110,000 7.063959453 Shares Outstanding 37703946.00

Should Sell For 57.59$

Value Undervalued

124

Intrinsic Models

The intrinsic models are used to determine how valuable a company is by

analyzing different models. The discounted dividends, discounted free cash

flows, residual income, abnormal earnings rate, and the long-run residual income

models were all used to gather good data on Green Plains. We believe that the

intrinsic models are more reliable than comparing Green Plains against the

market.

Discounted Dividends

The discounted dividend valuation model attempts to value a firm based

off of solely dividends. The discounted dividends model can demonstrate that

dividends are appropriate for valuing firms, while other times dividends are a

poor way to value a firm. The discounted dividends model only values the firm

based off of dividends, therefore the model cannot accurately construct the full

value of the firm. After running the discounted dividends model we identified

that dividends do not represent significant value of the firm.

The discounted dividends model is based on the forecasted future

dividends paid over the next 10 years. In order to forecast the next 10 years of

future dividends, we had to look at the previous dividends paid. Green Plains

Inc. however just started paying dividends in 2013, proving difficult to produce

accurate dividends forecast for the next 10 years. Additionally Green Plains Inc.

increase their dividends three fold from 2013 to 2014 ($0.08 DPS to $0.24 DPS).

125

We knew that this type of dividend growth would not be sustainable, so we grew

out the dividends year by year around 10% to 20% with a few odd years thrown

in above or below the 10% to 20% dividend growth rates to simulate stronger

and weaker years the company has.

Another component of the discounted dividends valuation model is

determining initial cost of equity. The growth rates were calculated from running

regressions at 13.7% with the size premium and lower and upper bounds values

of 6.34% and 21.06%. The upper and lower bounds values were rounded to

6% and 22%. The midway points between the initial cost of equity and the

lower and upper bounds values were calculated by determining a halfway point

at 9.5% and 18%.

Taking a 10% analyst position, the upper and lower bounds value of the

stock were calculated by taking 90% and multiplying it by the price of Green

Plains Inc. at 4/1/2015 (26.39) and the upper bound value was calculated by

taking 110% and multiplying it by the stock price at 4/1/2015 (32.25). The stock

is deemed undervalued if the price falls above the upper bound value,

undervalued if the calculated price falls below the lower bound and fairly valued

if the calculated price falls between the upper and lower bound values. The

perpetuity growth rates were kept relatively low to moderate because Green

Plains Inc.’s annual year over year growth is low.

The discounted dividends model demonstrates that Green Plains Inc. is

mostly overvalued based on our calculated cost of equity upper and lower bound

126

percentages, with a larger percentage of the chart being filled in with overvalued

prices. Green Plains Inc. appears to have a chance at being fairly valued

between the 6% and 9.5% cost of equity figures.

Discounted Free Cash Flows Model

The discounted free cash flows model combines both operating cash flows

and investing cash flows to value a company. In order to get the right figures to

calculate the price of Green Plains at 4/1/15 we had to forecast out both cash

flows from operations and investing activities. The cash flows from operating

activities were difficult to estimate because the cash flows from operating

activities were jumping around from negative to positive by significant amounts.

We compared the change in operating income, net income and operations to

sales and found that operating income was the most stable for forecasting cash

flows from operating activities. We subtracted net current assets from net cash

flows from net cash provided by investing activities to get free cash flows from

127

investing activities. After calculating the free cash flows from operations and free

cash flows from investing activities for the next 10 years, we subtracted the two

to get free cash flow from firm’s assets. Next we calculated the present value

factor by 1/((1+WACC BT)^period). We then took the present value factor and

multiplied it by free cash flow from firm’s assets to get present value year-by-

year free cash flows. Next to get total present value year-by-year free cash flows

we summed up the 10 present values year-by-year free cash flows. We decided

to throw out the 10th period perpetuity and use the 9th period perpetuity because

the 10th period’s free cash flow from firm’s assets didn’t make sense compared to

the 9th period. The market value of assets is calculated by adding the perpetuity

at period 9 to total present value year-by-year free cash flows. The book value

of debt and preferred stock is taken from total stockholder’s equity in the

balance sheet. To get market value of equity, we subtracted book value of debt

& preferred stock from market value of assets. We then divided the market value

of equity by the number of shares to get price per share. Then we must take the

price per share and move it ahead to 4/1/15 from 12/31/14. To do this we had

take the price per share and multiply it by ((1+ WACC BT)^(3/12)) to get the

time consistent price at 4/1/15.

The WACC before tax was used to prohibit double taxation. A type 10%

analyst was used, with the upper bound being calculated by multiplying the price

are 4/1/15 by 110% and the lower bound is calculated by multiplying the price at

4/1/15 by 90%. The firm is undervalued if the time consistent price is above the

128

upper bound and the firm is overvalued if the time consistent price is below the

lower bound. The firm value will be fairly valued if the time consistent price falls

between the upper and lower bounds.

The model is dependent on the perpetuity cash flow and if this value is

abnormally different than the rest of the cash flows, then the valuation model

may value the company with little accuracy. In our case we had an abnormally

sharp decrease in free cash flows from firm assets and yielded completely

inaccurate time consistent price values. We decided to throw out the problem

year “period 10” and calculate the perpetuity off of period 9. Doing so yielded

results that looked a whole lot more accurate. Based on the sensitivity chart, we

can conclude that Green Plains Inc. is undervalued. However the free cash flows

valuation model is very sensitive to changes in perpetuity growth rates and

WACC BT rates as we saw from the relatively large jumps in prices from each

change of the two variables. The high sensitivity is caused by estimation errors

in WACC BT and perpetuity growth rates.

129

Residual Income Model

The residual income model takes into account the forecasted net income

and dividends for the next ten years. Stockholder’s equity in 2014 is also a

crucial part in this model. We took the percentage in the sales growth from 2010

to 2014 to get the forecasted net income for ten years. We then decided to use

the net income and dividend changes to get our forecasted stockholder’s equity.

Once we got our forecasts we then used the stockholder’s equity and added in

net income while subtracting the dividends from the previous year. After we did

that we found the annual normal income by taking that value and multiplying it

by the cost of equity that we had. The residual income is the difference between

the net income and the annual normal income. We then figured out what the

residual income was when discounted back to year zero to get a present value.

To figure out the terminal value all we did was add up all the residual incomes

from each year at present value. The terminal value is used to figure out the

market value of equity. Once we have the market value of equity we then

divided it by the shares outstanding from 2014 which gives us the model price at

the beginning of 2015. The last thing that we did was to get the model price

consistent with the time right now so we took the number multiplied the factor

to the fourth. We raised it to the fourth because it has only been a quarter so far

in 2015.

130

Growth Rate

Ke

The chart shows the sensitivity if the cost of equity or the growth changes

by certain percent. Our lower bound for the cost of equity is 6% and the upper

bound is 22%. This ranges around what we believe to be an accurate

representation of cost of equity, 13.7%. The lower bound for the growth change

is at -10% and then -50% for the upper bound. We concluded that this is the

best model because it ties in the statement of cash flows, income statement, and

the balance sheet. We also concluded that the residual income model is still

sensitive however because we could not get in our range for the price per share

with any of the boxes. Based on the sensitivity analysis we decided that the

residual income model shows that Green Plains is overvalued.

Abnormal Earnings Growth

The abnormal earnings growth is calculated a lot like the residual income

model but instead it takes into account the dividends reinvested into the

company at 13.7%. To start off we used the forecasted net income and

-10% -20% -30% -40% -50%

6% 34.72 33.85 33.46 33.24 33.1

9.50% 21.1 22.16 22.69 23 23.21

13.7% 12.5 13.99 14.8 15.31 15.66

18% 8.01 9.33 10.1 10.61 10.97

22% 5.84 6.9 7.55 7.99 8.31

UB LB

32.25 26.39

131

dividends that we had for the residual income model. This is where that we take

the dividends and come up with the amount to reinvest into Green Plains. We

take the net income and the reinvested dividends and add them to get the

cumulative dividends earnings. We then subtracted the normal earnings from the

cumulative dividends earnings to get the abnormal earnings growth. Once we

have the abnormal earnings growth, we then discount all the years back to the

present value and add them up to get the total. We added up the total present

value of AEG to the core net income of 2015 in order to total average net income

perpetuity. That number was then divided by the number of shares outstanding

to get 1.42. We multiplied the 1.42 by the capitalization rate to come up with an

intrinsic value per share. Finally, we then got the intrinsic value per share

calculated in April’s price.

Growth Rate

Ke

-10% -20% -30% -40% -50%

6% $39.54 $40.31 $40.65 $40.84 $40.97

9.50% $23.29 $21.60 $20.77 $20.27 $19.94

13.70% $12.93 $11.48 $10.69 $10.20 $9.86

18% $7.27 $6.31 $5.75 $5.39 $5.13

22% $4.27 $3.64 $3.26 $3.00 $2.81

UB LB

$32.25 $26.39

132

We used the same upper and lower bounds as the residual income for the

cost of equity and the growth rate. The cost of equity’s lower bound is 6% while

the upper bound is 22%. The lower bound is -10% and upper bound is -50% for

the growth rate in the sensitivity analysis. We concluded that the sensitivity

analysis shows us that Green Plains is more likely to be overvalued rather than

undervalued.

Long Run Residual Income Model

The long run residual income model is similar to the residual income

model because both models are calculating the market value of equity. The

difference between the two models is that long run residual income model

derives market value by using cost of equity, return on equity and various

growth rates, versus the residual income model uses just changes in the

perpetuity growth rate and cost of equity.

The long run residual income model calculates a market value of equity

with the following equation.

MVE= BVE [ 1 + ((ROE – Ke)/(Ke – g)) ]

Once the market value of equity has been calculated, we divided the

market value of equity by the number of shares to get the price per share at

12/31/14. We then used a perpetuity to grow the price per to share to 4/1/15.

Holding one of the three variables constant for each of the three sensitivity

charts then fills out the sensitivity charts. We then changed the other two

variables that weren’t being held constant.

133

The sensitivity charts all consistently demonstrated that Green Plains Inc.

is fairly valued. The residual income model is similar but demonstrates more of

an overvalued view of Green Plains Inc. than the long run residual income

model. The values between the four sensitivity charts were higher on the long

run residual income model than the regular residual income model. The residual

income sensitivity analysis also had larger and smaller extremes.

135

Sources

1) Green Plains 10-K

2) Valero 10-K

3) ADM 10-K

4) Future Fuels 10-K

5) http://www.gpreinc.com/ar_archive/2013interactive/

6) http://www.energyresourcefulness.org

7) Howstuffworks.com

8) Census.gov

9) Wall Street Journal

10) Greenplains.com

11) U.S. Energy Information Administration

12) Ethanol Producer Magazine

13) National Agriculture Statistics Service

14) Business Analysis & Evaluation 4th Edition: Palepu, Healy

15) Intermediate Accounting 14th Edition: Kieso, Weygandy, Warfield

16) Corporate Finance Textbook

17) Farm-Equipment.com

http://www.energyresourcefulness.org/Fuels/ethanol_fuels/modern_production_of_ethanol.html

136

Appendix:

Capital Structures Ratios:

2010 2011 2012 2013 2014

Green Plains 2.21 3.02 3.11 2.68 3.00

ADM 3.2 3.84 3.3 3.3 3.04

Valero 3.00 3.83 4.11 3.92

Future Fuels 1.68 2.36 2.65 3.43 2.7

GP Re-Stated 1.95 1.81 3.48 2.49 2.29

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Altman's Z-Score

2010 2011 2012 2013 2014

Green Plains 1.81 1.81 1.75 1.81 1.29

ADM 0.47 0.44 0.34 0.27 0.28

Valero 0.5 0.41 0.36 0.32 0.28

Future Fuels 0.36 0.34 0.37 0.26 0.29

GP Re-stated 2.01 2.9 1.86 1.81 1.29

00.5

11.5

22.5

33.5

Debt to Equity

137

Profitability Ratios:

2010 2011 2012 2013 2014

Future Fuel 18.8% 20.3% 16.9% 23.0% 21.8%

Valero 4.64% 4.59% 5.24% 4.66% 6.36%

ADM 6.23% 5.33% 4.00% 4.33% 5.87%

Green Plains 7.1% 4.8% 2.8% 5.7% 11.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Gross Profit Margin

2010 2011 2012 2013 2014

Future Fuel 14.7% 16.9% 13.6% 20.7% 18.5%

Valero 2.28% 2.92% 2.88% 2.87% 4.51%

ADM 3.96% 3.33% 1.89% 2.08% 3.52%

Green Plains 3.1% 1.7% 0.7% 2.4% 7.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Operating Profit Marins

138

Liquidating Ratios:

2010 2011 2012 2013 2014

Future Fuel 10.5% 11.3% 10.1% 17.0% 17.6%

Valero 0.39% 1.66% 1.50% 1.97% 2.77%

ADM 3.13% 2.52% 1.52% 1.49% 2.77%

Green Plains 2.3% 1.1% 0.3% 1.4% 4.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Net Profit Margin

139

2010 2011 2012 2013 2014

Green Plains 10.72 14.76 19.65 18.11 11.22

ADM 7.52 7.77 6.28 6.8 7.34

Valero 15.99 22.74 22.76 22.44 19.79

Future Fuels 4.543 6.645 6.67 6.87 4.7

-

5.00

10.00

15.00

20.00

25.00

Ax

is T

itle

Inventory Turnover

142

Method of Comparables:

145

Size Decile

Market Value

of Largest

Company

Percent of Market

Represented by

Decile

Avg. Annual

Stock ReturnBeta Size Premium

1 – smallest 235.6 1 21 1.41 6.4

2 477.5 1.3 17.2 1.35 2.9

3 771.8 1.7 16.5 1.3 2.7

4 1,212.30 2.2 15.4 1.24 1.9

5 1,776.00 2.6 15 1.19 1.8

6 2,509.20 3.5 14.8 1.16 1.8

7 3,711.00 4.3 13.9 1.12 1.2

8 6,793.90 7.4 13.6 1.1 1

9 15,079.50 13.6 12.9 1.03 0.8

10 – largest 314,622.60 62.3 10.9 0.91 -0.4

WACC (restated) Amount Weight Rate Weight*Rate



WACC 10.30%


Firm value 953332 Tax Rate 28.90%

WACC (as stated) Amount Weight Rate W*R

Market Value of Liabilities 399440 44.41% 6.50% 2.89%

Market Vaule of Equity 500049 55.39% 3.37% 1.87%

WACC 4.76%

Firm Value 899489 WACC after tax 3.93%

tax rate 28.90%

146

Regressions:

WACC UB (restated) Amount Weight Rate Weight*Rate



WACC 14.18%


Firm value 953332 Tax rate 28.90%

WACC LB (restated) Amount Weight Rate Weight*Rate


Market value of equity 500049 52.6%6 6.34% 3.34%

WACC 6.43%


Firm value 953332 tax rate 28.90%

149

Intrinsic Valuation Models:

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