The Burning Man Visits Ethanol (PEIX, AVR, VSE)

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Ethanol stocks have been getting pounded since their IPOs and the sector has lost its luster.  Pacific Ethanol Inc. (NASDAQ:PEIX) was the exception for a while as it has Bill Gates as an investor ahead of the great ethanol boom.  But share prices for Aventine Renewable Energy Holdings (NYSE:AVR) and VeraSun Energy Corp. (NYSE:VSE) have fallen so far from their IPO prices that if you looked at a chart without a time period attached you might assume you were looking at any dot-com flame-out from 2000 to 2002. The bloom was off the rose from the beginning.

Recent rumors put VeraSun as potentially being toast, andyesterday’s earnings release from Aventine will do nothing butcontribute to that endless slide. Aventine reported EPS of $0.06against analysts’ expectations of $0.12, and revenue of $599.5 millionagainst estimates of $716.37 million. Excluding non-cash gains of $18.4million, the company managed only to break even.

Aventine also noted that it will delay the opening of its Aurora Westplant in Nebraska by three months and is considering delayingconstruction of another new plant. About two-thirds of Aventine’s cash,$60 million, resulted from tapping its revolving credit line.

Six weeks ago VeraSun was trading around $5.00/share. Then it announcedthat it was expecting to report a loss in the third quarter. The stockpromptly dropped from $5.22 to $1.41, and it closed yesterday at$0.44/share. Pacific Ethanol is equally awful, falling from a 52-weekhigh of $9.88 to close at just $0.86 yesterday.

As gasoline prices fall, and US drivers start to hit the road again,demand for ethanol will certainly increase. But then so will feedstock(corn) prices, and profits will be stifled again.

Here’s something to ponder, but skeptically: could the ethanol producers be too small tofail? If automakers can get a piece of the federal government’s $700billion rescue package, what’s to stop ethanol producers from gettingin line for a handout. After all, ethanol helps farmers, reduces ourdependence on foreign energy supplies, and is less harmful to theenvironment.  Even though we think it a waste of capital, in thesecrazy times of big hand outs and with an unknown White House policy beyond 2008 it seems anything could happen.

As you will see the chart from over the last two years, these stocks would have been the best way to burn money that you could some up with.


Paul Ausick
October 31, 2008