Two Ethanol Plays: Pros and Cons

Zacks senior alt-energy industry analyst Jon Kolb has following this particular group of stocks for years, back when alternative fuels were considered more of a pipe-dream (and gasoline was relatively inexpensive). He recently gave us an updated outlook on a couple major players in the ethanol sub-sector.

What’s one of your top names in alt-energy, and how did it perform recently?

VeraSun Energy (VSE) registered nearly six-fold growth in revenue in the 2nd quarter of fiscal 2008 after its merger with fellow biofuel company U.S. BioEnergy. Earnings were boosted by both higher ethanol production volume and average per-gallon price, year-on-year.

Looking ahead, increasing ethanol prices, recent bullishness in the energy bill for ethanol production, rising crude oil prices, ongoing capacity expansion plans and value unlocking through synergies from the recent merger with USBE should maintain growth momentum over the near-term.

Where do you perceive the risks to be with owning this stock?

Risks include the cyclicality of the ethanol industry, a tight credit market, a rising debt level and escalating prices of corn and natural gas. As of now, we maintain a BUY recommendation on VSE with a six-month target price of $9.75, representing 38.7% upside potential.

Can you tell us about another recently reviewed alt-energy company?

Aventine Renewable Energy’s (AVR) favorable top-line growth prospects stem from its ongoing capacity expansions through new plants in Nebraska and Indiana, recent bullishness on the energy bill for ethanol production, rising ethanol prices, an ongoing share repurchase program, and high crude oil prices. These factors should help maintain the momentum of future growth.

However, like its peers, the low-cost ethanol player is facing escalating cost structure though on a lower scale on account of rising corn and natural gas prices. Such price volatility along with loss related to auction-rate securities impacted AVR’s performance in the 2nd quarter of 2008.

So how are you recommending AVR at this time?

Rapid ethanol supply growth continues while demand has been held back due to constraints in refineries infrastructure. Therefore, with a mixed outlook, we maintain a Hold recommendation on AVR with a six-month target price of $7.75, representing 8.8% upside potential.

Jon Kolb is a senior analyst covering the alt-energy industry for Zacks Equity Research.

Comments

[redbaron:]

Proposed ethanol plants on the Mississippi River in West Central IL have been unable to get enough natural gas to get beyond the proposed stage of development. Why not just burn the corn and natural gas, and save on the processing and transportation?

2008 Aug 25 08:07 AM

[Tim Plaehn:]

Can't use either corn or NG as vehicle fuel. Ethanol is currently 7% of the auto fuel used in the country and rising.

2008 Aug 25 10:54 AM

[tessant:]

I really thought the ethanol craze was over...if corn goes down in price, it could get popular again..

2008 Aug 25 11:22 AM

[unimpressed...:]

The alternate energy program is the biggest government sponsored scam of the twenty-first century. There isn't enough corn in the world to cover the demand for food and fuel; and, there never will be!

Nancy Pelosi, the dimwit from fruit and nuts land, a.k.a. San Francisco, is a leading example of the chicanery being practiced by government officials in their quest to deceive the American people into supporting schemes that will contribute to the politicians' plans for wealth. She has, surreptitiously, invested about $150,000 in T. Boone Pickens latest proposition to have the taxpayers underwrite his dubious plan to push alternate energy proposals. He has asked California taxpayers to grant him a $10 billion bond to get his program moving with no guarantees that the investment will make any difference in the struggle to achieve energy independence. Of course, Pickens and Pelosi will come out winners while the taxpayers get screwed, again.

Oh yes, Pelosi’s investment is, definitely, a conflict of interest. Alternate energy is a government-sponsored program and the Speaker has a very real influence on the content and funding of this legislation. Will she be punished? Very doubtful.

However, back to the original premise of the future and worth of alternate energy and ethanol. The American people, over 70% of them, are demanding the implementation of the Republican proposal to Drill Here, Drill Now, Pay Less. They will not tolerate the Democrat weaseling and procrastination on this very important issue. Already, the Dems (Dims) are awaking to the fact that it is an election year and the electorate is mad as hell and won’t take it any more. Of course, the Dem proposals on energy independence are worthless and time consuming and will go nowhere. Look for a big movement to oust them in November.

The Republicans aren’t much better but, at least, they have a workable and worthwhile program to achieve energy independence before we pursue alternate energy as a final solution.

2008 Aug 25 12:54 PM