I have been writing about Archer Daniels (NYSE:ADM) for some time now - ever since I noticed from the charts that the mood had reversed and also observed a reversal in oil prices. I have been looking at US BioEnergy (USBE) over the last few days and have some good words for the stock.
USBE IPOed in mid December 2006 - at a time when the entire ethanol sector was down on declining oil prices, and competitor Hawkeye Holdings had just withdrawn its IPO. Although the stock made a high of $17.72 in early Jan'07, sector woes soon took over and the stock fell to a low of around $11 in late January - a rapid decline of approximately 62% (Technical analysts would call it a key absolute retracement level). The decline was arrested late January - around the time when President Bush called for a huge government-mandated increase in renewable fuels - mainly ethanol.
The stock has been trading between $11 and $13.5 since then.
USBE 3-mo chart
For technical analysts following demand and supply principles, range bound trading following a steep fall typically represents accumulation - wherein there is a substantial shift in ownership of floating stock from emotionally weak participants to emotionally stronger participants who are willing to give the stock more time to perform.
On March 30th, the company announced its full year results. The shift in revenue mix to sales of ethanol and distillers grains (from marketing and services business prior to May 2006) and an expansion of its ethanol producing capacity helped the company post Excellent results. Q4'06 profit of 35c beat analyst estimates of 21c and ensured a healthy full year EPS of 41c. The company has indicated plans to increase ethanol production capacity by 140% and intends to do so by setting up four more plants by end of 2007 (one more is being planned for 2008?).
Amongst the company's largest shareholders are Ron Fagen, Founder and CEO of of Fagen Inc., a leading builder of ethanol plants and CHS Inc., the largest grain marketer and energy cooperative in the US. These relationships should go a long way in ensuring a successful execution. The recently released Department of Agriculture report that puts a record acreage under the production of corn is expected to keep raw material prices (for the ethanol sector) in check.
The stock has now begun to show clear signs of recovery with a 2% rise Monday and the 2% rise Tuesday. Needless to say, with oil strengthening and such excellent earnings performance I am looking forward to further gains on USBE. As a short term trader/analyst, I anticipate a quick rally to $13.5, ceiling of the trading range, in the first instance. I do expect a move above this range subsequently - so long term investors should also be well rewarded as well.
Disclosure: Author has no position in this stock as at the time of writing