Origin Materials’ shares are trading below $6. This is nearly 60% off their February high. At this price, I am bullish on Origin Materials, given the chance it has to disrupt multiple massive end markets while helping some of the world’s largest companies decarbonize their supply chains. 

Business Description

Origin describes itself as a “carbon negative materials company with a mission to enable the world’s transition to sustainable materials by replacing petroleum-based materials with decarbonized materials in a side range of end products…” Essentially, this is a fancy way of saying that Origin has developed technologies that allow manufacturers to replace plastics and other petroleum-based source materials with sustainable feedstocks made from materials like sustainably harvested wood, wood waste, cardboard, and agricultural waste.

We’ve all heard stories in the past about companies paying lip service to being environmentally friendly and to decarbonization, only to pull back when it affects their bottom line. These types of investments should be treated with caution, given the reality.

Origin is different because it doesn’t require customers to alter their products and processes. As co-CEO Rich Riley explains on the Q2 earnings call, “Importantly, our solution is designed not to require companies to change their products or processes…There are near zero switching costs because we produce a material identical to what they currently use. The only difference is that our feedstock is derived from plants rather than petroleum.” 

It is all about the fact that switching costs are negligible. If Pepsi (PEP) can incorporate Origin’s feedstocks and use them to replace their petroleum-based feedstocks without having to make an expensive capital outlay to retrofit its bottling machines, for example, that would have massive appeal to all parties involved. On the Drill Down podcast with Cory Johnson, Riley states, “When we meet with (potential customers) they are very excited to find that there is a drop-in material,” meaning that they “don’t have to change anything” in switching production to Origin’s materials.

“They don’t have to change anything – the product, the packaging, or the machine tooling,” Riley explained. “A lot of biomaterials companies show up and for the company, it is a big project and they have to change everything,” in terms of their manufacturing process. 

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End markets

As a pre-revenue company, investing in Origin is speculative in nature, but investment from some of the world’s largest CPG (consumer packaged goods) companies, like Pepsi, Nestle (NSRGF (OTC:)), and Danone (DANOY (OTC:)) give Origin credibility and help to de-risk the investment. These giants of consumer packaged goods want Origin to succeed. 

Origin isn’t just interested in disrupting plastic containers and beverages, but also developing carbon negative insulation for gear such as Patagonia (LULU), Lululemon, etc. Nike (NYSE:) and Adidas (OTC.:). Regarding the partnership, Riley stated, “Many apparel companies are eager to decarbonize, but they don’t actually manufacture their own products. This is where our partnership with PrimaLoft can have a huge impact.”

Ford (F) has also partnered Origin to investigate using Ford’s materials in EVs. Ford claims that EVs use three times the amount of plastic than traditional cars. Origin’s management clearly shows that they are resourceful, and have reached out to many potential new markets. As Riley stated on the company’s Q2 earnings call, the “majority of plastics are used in textiles, cars and other household products. Just capturing a small portion of the incremental annual growth in plastics is more than enough to manage to build our business.” If Origin can take just some market share in each of these different end markets, investors should benefit greatly. 

Valuation

Origin is not a company that has been restructured and is therefore difficult to evaluate using traditional financial metrics. The company’s current market cap of sub-billion dollars could seem very low given its target markets and the fact that it has a limited market share. While the company does not have revenue to report, it often states that it currently has $3.5 billion in demand – signed documents, ranging from LOIs to “full take-or-pay contracts meant for project financing.” 

Sentiment

Origin is rated as a ‘Hold’ by all three analysts covering the stock. The $9 target price for Origin Materials is a 42.9% premium over current prices. 

Risques

Origin is a risky investment because it is pre-revenue and may not produce material revenues or even profits for several years. Origin claims it doesn’t expect to earn revenue before 2023. 

While Origin’s technology is impressive, it must be noted that it has not yet been commercialized on the massive scale that would be required for use by end users like Pepsi. As Origin itself warns in its S1, “While we have succeeded in producing small amounts of our products in the pilot plant for customer trials and testing purposes, we have not yet commenced large-scale production.”

Construction of the first two main production sites, Origin 1 & Origin 2 is ongoing. Origin 1 will be finished by 2022, while Origin 2 will take place in 2025. Construction delays and cost overruns during the construction of these facilities will be detrimental to Origin. These types of problems are not uncommon in construction, so it is important that this risk be closely monitored. 

Takeaway

Origin Materials, a pre-revenue growth company in its early stages, will need to wait several years before it can realize its strategic goals. Given the massive end markets it is targeting, and the desire of many of the world’s largest corporations to become more sustainable, if Origin can achieve widespread adoption, this could become a multibagger. Origin will not make a profit if its strategy isn’t implemented or its technology cannot be commercialized on a large-scale.

This company stands out amongst other sustainability play because of the relatively low switching costs that Origin’s materials can be incorporated into their supply chains. I believe that investing with credible blue-chip companies such as Nestle or Pepsi, and the huge tailwind of ESG forces will reward investors with patience and a longer time horizon who allocate a small amount to Origin Materials in their portfolios. 

Disclosure: Michael Byrne held a Pepsi position at the time this article was published.

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