Is VeraSun a Good Buy?

Reader's Question:  Hi Bob! My name is Ivy K., 26 year old nursing student in Las Vegas, NV.  I'm a complete newbie in the world of stock market investing. I joined CNBC.com's Portfolio challenge this morning.  I'm writing because I need some advice on how to to search / research for good stocks.  I read your June 23, 2008 article about FLUOR and why it's a good pick.  Where did you get the news about their earnings and etc.?

One of the stocks I picked for my virtual online portfolio is VeraSun Energy Corp, which I chose because alternative energy is always on the news, even on CNN.

I am glad that you enjoyed my write-up on Fluor (FLR), and my explanation of why I believe it is a good "pick." In this post, I will use your question about VeraSun (VSE) to illustrate my philosophy and method of researching any company that may have caught my attention in order to determine whether it presents a good investment opportunity.

You first asked me about "where I got my information on the earnings, etc.?"  That's easy.  I am a big fan of Yahoo Finance [and no I don't own any shares in Yahoo! (YHOO)].  All you need to do is enter the symbol of the company that you wish to investigate into the box next to the "get quotes"  button and you will get company-specific information.

I generally find the logo by first going to the homepage for the company.  Virtually every company has a homepage on the internet.  To get the location, you can go over to the Yahoo "Profile" for VSE. 

Is you are interested, the link to VeraSun's homepage can be found here.

A description of the company can be found on Yahoo's Profile page of the stock:

VeraSun Energy Corporation engages in the production and sale of ethanol and its co-products in the United States. Ethanol is primarily used as a blend component in the gasoline fuel market. The company's ethanol co-products include wet and dry distiller grains with solubles, which are used as animal feed; and corn oil that is used as an animal feed, as well as to produce biodiesel. It also markets VE85, an ethanol blended fuel through arrangements with gas distributors and retailers.

So now, we can see that this particular company, that I have not been previously familiar with, is involved in ethanol production.  Certainly, this has been a very 'hot' area in the stock market. 

There isn't anything wrong with buying a 'trendy' kind of stock.  In fact, you could ride the obvious positive sentiment, which may work out to price momentum hopefully to the upside.  This isn't particularly my approach--but there are many ways to select stock and this might work for you!

However, my own next step in looking at a stock is to check out the latest quarterly report.  From my perspective, I am looking for companies that are growing their revenue, increasing their earnings, possibly beating guidance, and hopefully raising expectations.  I realize that this is a lot to ask from a quarterly report, but remember that we cannot expect to buy every stock.

By the way, I do NOT own any shares of VSE nor do I have any options.  

If we look down the left side of that “Profile Page on Yahoo,” we can see the "Headlines" link. You might have been expecting something more spectacular than this basic approach :), but I do a lot of 'scrolling' through these headlines (one each stock I review) to find the stories about earnings and significant developments.

I did see a story about delaying the startup of the third ethanol production facility this month because of "market conditions".  I don't like the sound of that story...hmmm.  By the way, on Wednesday (6/25/08) VSE closed at $4.11, up $.13 or 3.27% on the day. Generally, I have been avoiding low-priced stocks under $10/share, but that is another story.

Now, let's keep looking for those earnings.

On May 12, 2008, VeraSun reported first quarter 2008 results.  Revenues literally exploded, climbing 257% to $516.5 million.  Net income turned positive at $7.6 million or $.08/diluted share vs. a loss of $(.3) million during the same quarter last year.

That report looks good; however, you probably know that I believe that earnings' expectations are often critical in determining whether certain financial results are actually good or bad news!  In other words, if we look through the news, we can get another report from the Associated Press [AP] that indicates that the company missed expectations on earnings ("Analysts polled by Thomson Financial expected, on average, earnings per share of 16 cents.").  Within the same article, the reporter notes that the company did beat expectations of $500 million in revenue when it reported the $516 million result. 

Therefore, the earnings news was at best 'mixed' although on the surface they appear pretty spectacular.

And check a chart over at StockCharts.com: 

The chart isn't very encouraging to me.  This kind of chart is known as a "point & figure" chart with columns of x's to suggest climbing stock prices, and o's to demonstrate declines.

I feel like I am 'late to the party' but I would be reluctant to buy these shares, at best a "hold," but more likely  VeraSun is rated a "sell."

That wasn't what you wanted me to say, but it just doesn't work for my strategy.  The last quarter was great but the company missed expectations.  It is delaying its ethanol plant openings because of "market conditions," it is burning up its available cash, and the chart looks awful to me. 

Disclosure:  The author does not own VSE.

 

Comments

[AKinSS]

Good explanation

[bm1087]

Article failed to mention that despite negative press, record high corn and nat gas that the company grew revenue and made a profit.

[Stockaccumulator]

A far better play today is to just buy SOL (Renesola) With an 8 forward PE, SOL is a bargain, and far better investment than ESLR... today is the last day you will see SOL at today's prices... Here is what Zacks just announced today about amazing SOL:As of this report, SOL trades at only 14.2x our current-year
2008 EPS estimate and only 8.8x our forward 2009 EPS estimate, or at the lower-end of the range of the
alternative energy industry. Likewise, SOL trades in the lower-end of a wide price-to-cashflow range for
its industry, although it also trades in the upper-end of a similarly wide price-to-sales range. Accordingly,
with a bullish outlook, predominantly discount valuation metrics, and above industry average long-term
EPS growth expectations, we initiate coverage of on SOL with a BUY recommendation and a six-month
target price of $24.25, representing 27.2% upside potential.

[jjason]

I did this analysis last week and I did not buy VeraSun. The company has an extremely low profit and it is a risk I would avoid.

[samb]

I still think this is a good hold stock if you buy it low, The flooding may have hurt these companys but the demand is growing. Iam going to hang on to this one and see what happens.

[Danno]

What a bloody genius this guy is. Does he ever really look at the big picture?
Verasun only exists because of egregious government pork to the agribusiness lobby.

1) grain-based fuels are highly destructive to soils, and the watershed from all the fertilizer run-off and eutrophication.
2) They consume massive amounts of water.
3) ethanol from sugarcane is far, far more economical, but prohibited from importing by the sugar lobby and the likes of Verasun thereby filching taxpayers and hurting the economy.
3) Are, at best, energy neutral since they consume as much energy to make as they provide to vehicles.
4) Put additional pressure on food prices and drive up inflation and feed the unrest in developing countries where corn is a staple.
5) what a tax on the poor and the rich for a select few!

[DanielJacome]

stock traded more than 11x its normal volume today -- INSIDERS are buying in here....

[biggo]

This will make you laugh-I know nothing about verasun- i saw it out of the corner of my eye- the next day I overheard two young guys on the path talking about it- I bought it- so far I'm very happy and I've read up and followed it very seriously- I think it's a friggin winner