Alto Ingredients (NASDAQ:ALTO), a leading player in the American specialty alcohol market, is poised for growth in the micro-cap space. The company operates five alcohol production facilities and also produces essential ingredients for various industries. While recent negative EBITDA readings may have deterred novice investors, there are indications that ALTO is on the cusp of a turning point.
Management has hinted at improved crushing margins and expects a rebound in travel activities to support fuel-grade ethanol margins in the second and third quarters. Additionally, ALTO has undertaken transformative projects to diversify its product offerings and mitigate the impact of fluctuating ethanol-crushing margins.
By expanding its presence in high-margin product pockets like grain-neutral spirits, corn oil, and high-quality protein, ALTO is positioning itself for substantial growth. The company has upgraded its distillation systems to produce premium products used in the food and beverage, pharma, and personal care industries. These products are expected to contribute to EBITDA and generate substantial benefits in the coming years.
Furthermore, ALTO is optimizing its manufacturing prowess, plant efficiency, and fuel sourcing. Efforts to enhance corn oil production using new technology and expand corn storage facilities are expected to boost EBITDA. The implementation of a new natural gas pipeline will also reduce energy costs.
Considering these initiatives, ALTO’s EBITDA is forecasted to grow four-fold over the next three years, reaching $67 million by the end of FY25. With such promising prospects, ALTO presents an attractive investment opportunity.
Despite experiencing a relatively turbulent year, ALTO has delivered positive returns, outperforming its micro-cap peers. The recent uptrend has reinforced management’s confidence, leading to stock buybacks and potentially supporting the share price.
Moreover, there is still potential for rotation momentum, as ALTO has not yet breached the mid-point of its medium-term range compared to the iShares Micro-Cap ETF. This suggests further room for growth.
However, there are some concerns that investors should be aware of. The long-term descending channel observed in ALTO’s stock price history suggests limited upside potential at present levels. Additionally, an increase in short interest indicates lingering uncertainty. While the recent rally has been driven by retail interest, institutional investors have been reducing their stake in ALTO.
In summary, ALTO Ingredients exhibits promising growth potential, driven by strategic initiatives and expanding product offerings. With a positive outlook for EBITDA and the potential for further rotation momentum, ALTO presents an enticing investment opportunity. However, investors must consider the long-term descending channel and the presence of short sellers in the market. It remains to be seen how these factors will impact the stock’s performance going forward.
