Pacific Trader: Can this biodegradable plastic maker turn a good idea into a winning investment?

Good Natured Products is growing revenues and improving margins despite the slump in its stock.

That Good Natured container is biodegradable, but it doesn't come cheap

Credit: Good Natured Products Inc.

That Good Natured container is biodegradable, but it doesn’t come cheap

Good Natured Products is growing revenues and improving margins despite the slump in its stock

The stock: Have you ever looked at all the plastic in your grocery bags and kitchen and bathroom cabinets and wondered, How hard can it be to make waterproof, airtight, sterile material that won’t still be poking out of the landfill 500 years from now? Vancouver-based Good Natured Products (TSXV:GDNP) has answered that question with a selection of 400 biodegradable containers, household items, industrial supplies and medical packaging made from plants that look and act just like plastic made from petrochemicals. The challenge now is proving that this good idea can translate into a money-making opportunity for investors.

The drivers: The company went public seven years ago as Solegear Bioplastic Technologies. That was around the time the drive for analyzing investments on the basis of environmental, social and governance (ESG) criteria started taking off, something Good Natured should score well on. So why isn’t the company every sustainable fund manager’s darling? Well, it’s still not breaking even, though it’s getting close. In the first quarter of 2022, it lost $1.6 million on revenues of $25.9 million. But consider that a year earlier, it had a larger net loss, $1.9 million, on sales of just $7.9 million. So margins are moving in the right direction.

The company is not immune from inflationary pressures that manufacturers of all kinds are having to contend with, however, and at around $1 per disposable food container, its products are already more expensive than the petroleum-based standard by several orders of magnitude. People and companies must be willing to pay a very substantial premium for the “good nature” of its products, in other words — a big ask should the economy go into recession.

Good Natured has spent most of its trading history in penny-stock territory, with a brief spike to a high of $1.68 in early 2021. It closed Tuesday at 44 cents, giving the company a market capitalization just under $100 million (which is less than its projected revenues for 2022).

Word on the street: Good Natured Products “continues to demonstrate solid results in the face of stiff macro and inflationary headwinds,” acknowledged Raymond James analyst Steve Hansen, who nonetheless downgraded the stock to “market perform” with a $1 target price following the release of the Q1 results. Ahmad Shaath of Beacon Securities sounded more bullish. “In our view, GDNP shares have never looked so attractive, with current valuation of just 16.6x enterprise value to sales, compared to peers’ average of 4.3x,” he enthused. Shaath’s target is $2 with a “buy” rating.

Coming & going: Speaking of ESG, Teck Resources (TSX:TECK.A, TECK.B; NYSE:TECK) has kicked off a commitment to rehabilitate or conserve three hectares for every hectare affected by its mining activities with a donation of land and cash to create nature reserves on 14,000 hectares near its operations in B.C. and Chile. Often cast as an environmental villain, the company aims to become “nature positive,” it said.