Barron's sees ethanol stocks poised for a rebound

Posted Jun 10th 2008 5:21PM by Eliza Popescu
Filed under: Forecasts, Consumer Experience, Economic Data, Oil, Agriculture

While many of us may think that ethanol companies are not a reliable investment, Barron's asks us to reconsider our thoughts, pointing out to a bright futures for those stocks. People's worries about ethanol companies came as a result of soaring crude oil prices. Thus, the general tendency was to use corn-based alcohol as a substitute for gasoline. The negative reaction was an immediate consequence, and a top official of the United Nations has named ethanol as a "crime against a great part of humanity" as it lead to higher food costs.

Barron's points out three ethanol producers, VeraSun Energy Corp. (NYSE: VSE), Aventine Renewable Energy (NYSE: AVR), and Pacific Ethanol Inc. (NASDAQ: PEIX), which faced difficult time over the past year, although they saw a nice rebound recently after reporting first-quarter operating profits, and Congress passed a farm bill.

Looking ahead, the companies showed optimism related to their further production based on projected 2009 capacity. This takes into account the completion of plants under construction when talking about Aventine and VeraSun. Thus, VeraSun has a projected production of 1.6 billion gallons, Aventine came with 433 million, while Pacific Ethanol has a projected production of 220 million.

Ethanol producers are also responsible for changes in ethanol and corn prices. "Ethanol is having a positive impact on gasoline prices," Aventine CEO Ron Miller noted. However, it's not quite cheap to buy these stocks. Aventine fetches 19 times projected 2008 operating earnings, and VeraSun, 21 times estimated profits. Pacific Ethanol is expected to came with a loss this year.

The benefits of using ethanol are not difficult to observe. Oil refiners get a credit of 51 cents per gallon of 10% ethanol blended with 90% gasoline. In addition, more than half the gasoline sold in the U.S. now contains ethanol, following a federal dictate. The blend between ethanol and gasoline is also economically justified. Ethanol now costs $2.50 per gallon, or about $2.00 a gallon to refiners after the federal subsidy. The wholesale price of gasoline is above $3.30 a gallon. This help refiners save about $1.30 per gallon by using ethanol rather than pure gasoline. Even compared with higher corn prices, results prove profitability for ethanol producers.

On the bad side, Wall Street is concerned that ethanol profit margins, now 40 to 50 cents a gallon, will narrow in late 2008 and 2009 causing a lot of ethanol on the market. On the other hand, analysts forecast little new supply on the market after 2009 as a result of the depressed valuation of ethanol producers and difficult challenging credit markets conditions.

Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.

Tags: Aventine Renewable Energy, AventineRenewableEnergy, avr, ethanol, Pacific Ethanol, PacificEthanol, peix, VeraSun Energy, VerasunEnergy, vse

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Reader Comments (Page 1 of 1)

6-11-2008 @ 5:13AM

Glenn said...

Messing around with our food, is not going to get it, that is probably what happen to our tomato, someone tried making fuel out of them, did not work, so to recoup some of their loss, they put the tomato back in the stores. Leave our food alone, try something else. How about a uranium car.

6-11-2008 @ 7:45AM

Mary said...

It is not our incumbent that are the reason....our incumbent's are being lied to!
Go to YOU TUBE and seach and listen to JOHN PERKINS, The Confessions of an Economic Hit Man. and Lindsey William the Baptist Minister...This will open your eyes then send it to every soldier and person who has a son and daughter in the IraQ WAR! Do it NOW! Every AMERIAN should hear this, OPRA and DR. PHIL, where are YOU? GET these 2 insider MEN on YOUR SHOW!

6-11-2008 @ 7:44AM