Winners and Losers in the Ethanol Stocks

Here are some of the winners and losers in the ethanol sector.

Winners:

1) Aventine Renewable Energy Holdings Inc. (AVR):

The most recent of the Ethanol IPOs has been performing under-expectation since going public. This is not because of the company's individual performance but the diminishing hype of the ethanol sector as a whole. Aventine has quickly been given a bad reputation as one of the major losers of the 3rd quarter, declining 48.3% since reaching its 52-week-high of $40.83.

This is a misconception as Aventine has an optimistic future and a sturdy platform to build on. Aventine is already operating profitably with a solid P/E ratio of 12.89 and EPS of 1.62. Its income statement and balance sheet show productive growth in their financials; they have managed to double their net profit from $12,187,000 (quarter ending 31-Mar-06 ) to $24,654,000 (30-Jun-06 ).

From the analyst perspective the latest rating is a "Buy" by Analyst Heather L. Jones of BB&T Capital Markets (August 30) setting a target price to $36 dollars.

In terms of agriculture, Aventine controls a large portion of ethanol production, as it's the fourth largest producer of ethanol. It is currently producing 150,000,000 gallons of ethanol a year. They are also adding a 56.5 million-gallon-per year plant by 2007. Aventine is potentially planning to also develop three additional plants, all combined to produce 560 million gallons a year. This will give them an even larger percentage of the total ethanol volume sold in the United States (for the year ended December 31, 2005, it sold approximately 13.5% of the total ethanol volume in the United States ). Aventine is a good investment opportunity as it is currently reaching its support levels, and controls a large percentage of the ethanol market. All Aventine did wrong was show up at the right place at the wrong time.

2) Pacific Ethanol Inc. (PEIX):

The bearishness of Pacific Ethanol's performance, as it has gone down 67.2% since its 52-week high of 44.50, seems temporary. Their second quarter results have shown optimism as they managed to increase their net sales and decrease their net loss. Their future is what looks most promising, as they will make a heavy impact on ethanol production, though they have yet to produce a single gallon of ethanol. Their Madera, California plant (35 million-gallon-per year) is expected to be finished this November, and their BoarDMAn, Oregon plant (35 million-gallon-per year) by the second quarter of 2007. What is more appealing is that they have announced the production of three additional ethanol plants, each with 50 million gallon capacities (construction on all these plants are expected to begin before the end of 2007). Though this will take time, Pacific Ethanol is expected to produce 420 million gallons a year by 2010. Currently Pacific Ethanol is rated as a "strong speculative buy" at a 12-month price target of $36 by Paul J. Resnick of Dutton Associates. It will only take time before Pacific Ethanol begins to resemble Archer Daniels Midland.

The Basis for Dutton Associates rating is as follows:

1)Its first production facility (located in Madera, California ) will be completed on time and be producing ethanol in the fourth quarter of 2006.

2)The company has adequate equity funding to achieve its stated goal of constructing 420 million gallons of annual production capacity.

3)The Kinergy Marketing subsidiary gives the Company a strong distribution.

4)The Company's location in the midst of nation's largest ethanol market will provide benefits, particularly as technology supporting more feedstock alternative to corn develops over time.

Note: Paul J. Resnik has been following PEIX for quite a while now; let's see how his ratings correlate with the stock price:

Between 2/27/2006–5/18/2006
Rating Neutral, Pacific Ethanol 51.3 %

5/19/2006
Rating Speculative Buy, Pacific Ethanol 0.2%

5/30/2006
Rating Speculative Buy, Pacific Ethanol 21.8%

6/13/2006
Rating Strong Speculative Buy, Pacific Ethanol; 2.4%

6/28/2006
Rating Strong Speculative Buy, Pacific Ethanol; 2.6%

6/29/2006
Rating Strong Speculative Buy, Pacific Ethanol; 15.1%

7/28/2006
Rating Strong Speculative Buy, Pacific Ethanol; 3.2%

8/18/2006
Rating Strong Speculative Buy, Pacific Ethanol; 13.8%

9/21/2006
Rating Strong Speculative Buy, Pacific Ethanol; 8.1%

The results of the ratings don't look too appealing, but Pacific Ethanol's future still looks promising if oil prices remain the same.

3) Archer Daniels Midland Co. (ADM):

This Company is clearly the leader of the ethanol industry. Ranked no. 157 on the Global 500 (revenue of over 36 billion), it accounts for approximately 25% of all ethanol production. It currently is producing 1.07 billion gallons of the 4.83 billion being produced. It is one of the few profitable businesses in the sector, with an ideal P/E ratio of 18.95 and EPS of 1.999. Their income statement and balance sheet have continued to increase steadily, every quarter showing productive growth. Unlike the others, ADM has held itself better than any other stock in the sector since the pop of the bubble. Since hitting its 52-week high of $46.71m its stock has only declined 18.9% to $37.88. As for analyst ratings, on September 26, Prudential Financial reiterated its overweight (meaning to increase your investment position) rating, but reduced its price target from $49 to $45. Matrix Research upgraded ADM from "hold" to "buy" on September 14. On the same day, Davenport & Co upgraded ADM from "Buy" to "Strong Buy." If ethanol continues to prevail as the leading alternative to oil, the sector will flourish and ADM will be leading the pack.

Let's take a look at the recent history of analyst ratings correlated to the stock price:

14-Jun-06
Harris Nesbitt Neutral to Outperform, 0.2%

14-Sep-06
Matrix Research Hold to Buy, 0.5%

14-Sep-06
Davenport & Co, Buy to Strong Buy, 0.5%

26-Sep-06
Prudential Financial, Overweight, 0%

Though the analyst ratings haven't exactly correlated to the stock price, the presence of analyst upgrades show the optimism which they have for this company.

Losers:

1) Xethanol Corp. (XNL):

As I have reiterated many times, Sharesleuth has killed Xethanol's image. The past has put in doubt the future of this company. Since hitting its 52-week high at $16.18, XNL has dropped 81.3% to $3.03. Unlike ADM, Xethanol's income statement and balance sheet are very volatile, showing no signs of steady growth. In the quarter ending June 30, $5.6 million was spent on equity compensation. The media has played a large factor in Xethanol fate, resulting in it having to change its CEO, Christopher d'Arnaud-Taylor, due to questions surrounding him in the Sharesleuth report. Analysts are showing pessimism. Analyst Ian Horowitz, on August 23, cut his rating to sell and his price target to $1.35. When will Xethanol begin operating profitably? Or at least give a sense of trust to its investors? One thing which is promising is their expansion if executed. They current have a miniscule 5 million-gallon-per year plant, but are expecting to expand it by 35 million gallons. They also plan to construct a 50 million gallon per year plant in Georgia, and another 35 million gallon per year plant in North Carolina. Will this gain the trust of investors?

2) GS CleanTech Corporation ('GSCT.ob'):

This over-the-counter stock was the most volatile in the ethanol sector during the bubble, but ever since reaching its 52-week high of 32 cents and dropping 87.5%, it has been hovering below 10 cents for a couple months. Now at 4 cents, there is no hype or speculation to drive this stock up, since the ethanol hype has dried out and as a result less investors are attracted. Most of the current company news is focused on its patent pending Corn Oil extraction technology. Though they have found success in it, I don't believe it will have an effect on the stock price. Only thing which it will get them is more hype and speculation, since over-the-counter-stocks usually provide the largest gains in the shortest amount of time. Until this happens, this stock will continue to remain the same or decline.

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