VeraSun Energy: Beating the Odds

VeraSun Energy (VSE) has reported 1st quarter earnings and the results could be considered very good, given the current sentiment for ethanol producers. VSE increased quarterly revenue by 257%, primarily by increasing the volume of ethanol sold by 223%. VeraSun sold 191.7 million gallons of ethanol, including 49.5 million gallons it purchased from other producers to resell to its customers. VeraSun’s own production increased 138.6% from the 1st quarter of 2007.

The first thing I notice from this information is that there seems to be a very strong demand for ethanol! Who would have guessed that from recent news on ethanol?

Corn costs increased from $1.43 per manufactured gallon of ethanol to $1.68. This is in line with the additional 20¢ per gallon the company realized on the average sale of product to $2.33. This reinforces my contention that corn and ethanol prices are now inelastically tied. Corn and ethanol prices will rise and fall together, keeping the crush spread fairly constant. For an efficiently run company like VeraSun you can see that margin is about 50¢ to 60¢ per gallon of ethanol. Less efficient producers will have much tighter spreads and will only be profitable by efficiency gains.

On to profitability: For the first time in quite a while, VSE showed a increase in profits for YoY quarters and consecutive quarters. The company earned 8¢ per share for Q1,2008 vs. a small loss of less than 1¢ for the same quarter of 2007 and a 4¢ profit in Q4 of 2007. Not great profitability but a turn in the right direction.

Going forward from here, the shorter term (2-3 quarters), looks like tight profitability, but definitely in the plus column. Further out, VSE will increase capacity a further 50% by the end of 2008 and overall capacity growth will level off at about the same time. Ethanol blending in gasoline will continue to grow for both economic and environmental reasons. One thing many pundits do not realize is that ethanol companies are able to sell everything they produce and that trend will not change. VeraSun Energy as the largest, leanest producer of ethanol will see profitability increase over the next couple of years.

Note: I currently have a long position in VSE.

Comments

[LoveShorting:]

Disclosure: I am currently short VSE and sleeping well at night. Today
I was sad though because it only fell 8%. Maybe I'll take my wife to dinner with some of that 8%....

2008 May 13 12:45 PM

[avcacio:]

LS - Lets see how well you sleep tomorrow with the changing trend that will follow?

2008 May 13 09:23 PM

[Tim Plaehn:]

If you shorted when VSE was $15 you are in good shape. I started buying in the $6's so feel I have pretty good upside.

2008 May 14 10:40 AM