VeraSun Proves It: Size Matters (VSE, PEIX, AVR)

VeraSun Energy (NYSE:VSE) reported second quarter 2008 earnings before the market opened today. The company’s revenues soared by 499% to $1.015 billion, compared with $170 million for the same period in 2007. Net earnings also increased to $24 million (EPS of $0.15) from $15 million a year ago. Analysts estimated earnings of $0.02 EPS on revenues of $924 million.

VeraSun’s stellar report included results from the company’s mergerwith US BioEnergy, which took effect on April 1 and is expected tocontribute 420 million gallons annually of ethanol to revenues. Ethanolprices increased by $0.38 to $2.59/gallon, up 17.1% from a year ago,and production jumped to 256.5 million gallons as new facilities cameonline. Feedstock costs also increased to an average of $5.37/bushel ofcorn, up from $3.62 in the prior year period. That’s a jump of 48%.

Still in all, VeraSun performed much better than Pacific Ethanol(NASDAQ:PEIX), which reported[http://www.247wallst.com/2008/08/247-wall-st-mos.html] a loss for thequarter yesterday. Pacific’s feedstock costs jumped 67% and thecompany’s gross margin fell from 9.8% in the second quarter of 2007 tojust 0.2%. VeraSun’s gross margins also took a big dip, from 19.2% ayear ago to 7.1% this year.

Another ethanol producer, Aventine Renewable Energy Holdings (NYSE:AVR)also posted a loss on July31 for thesecond quarter, even though it managed higher production and a $0.29increase in its average sales price. Aventine took a hit of $8.5million related to auction-rate securities. Without that loss, thecompany would have posted EPS of $0.16 on net income of $6.6 million.Gross margins at Aventine also fell to 5.5%, from the year-agoquarter’s 6.9%.

VeraSun’s volume really helped it, as did it’s average sales price pergallon, which was $0.04/gallon higher than Pacific’s and $0.09/gallonhigher than Aventine’s. VeraSun produced nearly four times as muchethanol as Pacific; its costs were lower; and its sales price washigher. Aventine’s production for the quarter was more than 220 milliongallons. Going forward, size really is going to matter when it comes tomaking a profit from ethanol.

Paul Ausick
August 12, 2008