Ethanol Stocks Poised to Refuel

Here’s a positive article on Ethanol Stocks from Barron’s.  This presents a different perspective from most of what I’ve read lately.  

Ethanol Stocks Are Poised to Refuel

By ANDREW BARY

Excerpts:

"Everyone’s dumping on ethanol, but the biofuel has a bright future. Three stocks that could get a healthy burst of energy in the coming year.

NEXT TO CIGARETTES, FEW products are more vilified than ethanol. The corn-based alcohol used as a substitute for gasoline has been blamed for driving up food costs, leading to malnutrition and riots in the developing world. A top official of the United Nations has blasted ethanol as a "crime against a great part of humanity."

Even Wall Street, which loved ethanol stocks in 2006 and ’07, has turned against the business, because of growing supply and concerns about the future of the controversial fuel. Ethanol producer VeraSun Energy (ticker: VSE), at 6, is down 61% this year, and off 80% from its 2006 high of 30. Aventine Renewable Energy (AVR), at 5.25, is down 59% on the year, and far below its ’06 peak of 43, while Pacific Ethanol (PEIX), at 3.24, has fallen 60% year to date, and 90% from its ’06 high. Yet, even after this shellacking, most analysts covering the industry currently rate the stocks Neutral or Sell.

Ethanol stocks recently got a momentary lift from their lowly levels after all three companies reported first-quarter operating profits, and Congress passed a farm bill, over a presidential veto, that preserves most of the government’s ethanol subsidies. What’s more, the rally may resume, as the stocks are depressed, the businesses are profitable and the companies generally trade below the replacement cost of their ethanol plants."

"REFINERS ARE BLENDING ethanol with gasoline not because of government edicts but because it makes economic sense. Ethanol now costs $2.50 per gallon — or about $2.00 a gallon to refiners after the federal subsidy. The wholesale price of gasoline is above $3.30 a gallon.

This means that refiners save about $1.30 per gallon by using ethanol rather than pure gasoline. The savings per gallon of a 90/10 blend of gas and ethanol relative to pure gasoline is about 13 cents (10% of the $1.30 differential between ethanol and gasoline). Much of that gets passed on to consumers.

Ethanol may be controversial, but it has powerful friends in Washington and is helping millions of cash-strapped Americans save money on gasoline. This suggests that the ethanol industry is here to stay — and that hated stocks like Aventine and VeraSun could reward brave investors in the coming year."

 For more, click here.