Well, I’ve made my pilgrimage to the duck-boot mothership (LL Bean), and lolled away on the beach quite enough, thank you — time to jump back into the fray and see what the investing pundits are trying to sell you today.
And the one that percolated to the top of my inbox — which is the electronic version of a leaning tower right now, overflowing with so much stuff that I feel like a marmoset with ADD trying to jump from one teaser to the next — is from Nancy Zambell. And you can tell I’ve been away for a while, I wouldn’t normally try to mix metaphors quite so clumsily … though who knows, I’ve never been to Pisa, perhaps the place is lousy with monkeys.
Anyway, Nancy Zambell today is telling us that there’s a stock with a virtually locked-in guarantee of a 50% surge, and that the surge will happen overnight in about 45 days. If true, that would certainly be the kind of thing that ought to make a feller some money, no?
So what is it? Well, this one’s all about ethanol — the lead-in is BP’s horrific Gulf spill, and how that will only increase the push for alternative energy … and the only alternative energy that has any chance of making an impact on oil consumption is ethanol (oil goes mostly into transportation, ethanol is the only fuel that can be pumped right into the current gasoline distribution network, at least to some arguable extent).
But while the BP spill is perhaps increasing attention on ethanol and other alternative energy, the real impetus for a larger market for corn alcohol is the possible change in the maximum ethanol content of regular gasoline from 10% to 15%. Here’s how Zambell puts it in her ad:
“The EPA is now preparing a major announcement regarding the three-decades-old 10% (E10) ‘Blend Wall’ limit. All indicators are that its announcement, due in less than 45 days, will create a 50% overnight surge in ethanol use.
“Which way will the EPA go?
“Jitter-Free Profits Either Way!
“Before the kids go back to school this September, one of two things will happen.
1. You’ll either be reading about this overnight ethanol surge, absolutely thrilled because your stock is soaring…
2. Or, you’ll be reading about farmers charging the EPA with crimes… while you own a renewable fuel company that’s not only profitable but doubling revenues since the recession ended.”
So Zambell’s position is pretty clear — she sees blue skies ahead for this small cap stock, whichever one it happens to be (we’ll figger it out in a minute). She also, as other comments in the ad make clear, is convinced that the EPA decision will go the ethanol industry’s way and many of us will be driving our cars on 15% alcohol in the near future. She tries to debunk all the complaints about ethanol in a quick few bullet points (it doesn’t actually take more energy to produce than the fuel contains, it doesn’t raise food prices, it doesn’t corrode engines and won’t void warranties, and it creates jobs and cuts greenhouse gases).
She didn’t exactly provide a full list of footnotes for these declarative statements, but the corn and ethanol industries are big and there are plenty of studies about ethanol you can look to on both sides of the issue if you’re interested — but really, perhaps the most salient point is that ethanol production and farming have both improved considerably over the decades, particularly in terms of efficiency, and gas prices have gone up, and we were using quite a lot of ethanol, under government mandate, even before both of those things happened.
Archer Daniels Midland didn’t become a colossus under former CEO Dwayne Andreas by just letting US consumers be happy with cane sugar and alcohol-free cars, not when there were corn-derived alternatives available for government subsidy. And there are plenty of farm-state Senators and Congressmen who are hoping to get reelected this Fall … and politicians know that the anti-ethanol lobby is not nearly as organized and focused (or frightening) as the farm lobby and farm-state voters. There’s a reason why Senator Ben Nelson and his compatriots on Capitol Hill are pushing the EPA and the Department of Energy to get their ducks in a row for E15 and a 50% increase (roughly) in ethanol sales to the gasoline business, ethanol subsidies and tax credits have survived at least to some extent because the only really prominent loser is the US taxpayer, and she’s already losing so much already that it’s an almost invisible drop in the bucket.
And of course, as we probably remember from the last couple Presidential elections, there’s also cellulosic ethanol — ethanol from switchgrass or other non-food plants, that is produced with the benefit of advanced enzymes and new technologies. It’s not anywhere close to corn or sugar alcohol in terms of production volume or efficiency yet, but perhaps it will get there (and lots of companies are trying to profit from that, too, including some we’ve written about here like Dyadic Int’l and Novozymes). But this one is more of a “traditional” ethanol play, it seems. How about some clues from Nancy’s email?
“The One Stock You MUST Own Now to Profit BIG From ETHANOL’S SUDDEN 50% SURGE …
” * “This is a well-managed small cap founded in 2004 that’s making money producing ethanol, storing grains and cutting lucrative third-party marketing deals.
* “Since the recession ended, revenues have nearly doubled (to 426.5 million from $221.1 million) on higher production volumes and increased business from third-party marketing customers.
* “More than 124 million gallons of ethanol have just been produced – an amount that exceeds its expected operating capacity and proof that the company’s production process is top-notch and getting better.
* “And the stock is cheap.
“After losing $9.3 million during the recession-plagued first quarter of 2009, the company snapped right back with a $15.6 million first-quarter revenue in 2010.”
And just to keep things interesting, she throws in a little P.S. at the end as well:
“P.S. EPA LEAKS: After missing its June deadline, saying it wanted to be sure higher ethanol levels don’t damage engines built after 2007, the EPA has just leaked test results. United Press International states that, according to the EPA itself, “… engines in newer cars likely can handle an ethanol blend higher than the current 10 percent limit.” The surge is coming! Don’t you dare delay another moment – get The One Stock You MUST Own Now to Profit BIG From Ethanol’s Sudden 50% Surge absolutely FREE!”
There’s certainly some debate about the impact on automobiles (many folks think that cars that are more than a few years old — which is most of the cars on the road — would have some significant issues with corrosion from higher ethanol content, as they did during the changeover in Brazil years ago, but others think that’s just the auto and petroleum industries overstating the issue for their own gain). But yes, regulators have been extending the deadline for a decision on higher ethanol content for a long time now, and the latest news is that they do expect to share some kind of decision by the end of the Summer. I don’t know that they’ve specified a date, but “end of the Summer” comes up a lot in the discussion of this, and that’s roughly 45 days away (as long as you’re talking about the Summer of public swimming pools and kids out of school that unofficially ends on Labor Day — if you’re talking about the “official” season measured by the solstices, add a couple weeks).
But I’ve gotten off track again — what is this company? The Thinkolator, recently pulled out of a box marked “Misc.” and still missing a couple pieces, tells us that this must be … Green Plains Renewable Energy (GPRE)
GPRE is one of the survivors of the recent ethanol boom, bust, re-boom and re-bust, and it was indeed founded in 2004 (though their stock market listing dates back to 2006, near the high water mark for ethanol speculators). They describe themselves as the fourth largest ethanol producer, and they have a bit of vertical integration to their business that they hope will steady the ship as they attempt to grow (meaning, they’re involved in seeds and fertilizer on the front end, and marketing, logistics and blending on the back end, as well as the actual production of ethanol in distilleries/refineries).
And the numbers in the teaser are all in GPRE’s latest earnings release, so that’s a pretty perfect match (aside from the fact that Zambell’s copywriter mixed up revenue and earnings, which is unfortunately not that uncommon).
The stock does look drop-dead cheap at this price — analysts think they’ll earn $1.71 per share this year, and bump that up by almost 10% in 2011, which means they’re trading at a current estimated PE ratio of about 5 (and since they’re expected to grow those earnings 10%, you can say that they have a price/earnings/growth ratio, commonly called PEG, of .5, with many folks considering anything under a 1 to be a bargain valuation).
Of course, there’s another side to this — stocks don’t get priced at a huge discount to the market averages for no reason, so there has to be more to the story. In part, it’s just that people are terrified of ethanol stocks (and after collapses like VeraSun, Pacific Ethanol and, to a lesser extent, Verenium, it’s hard not to blame ’em); but in part, the bargain valuation is also a prediction of the future: The ethanol boom left us with huge capacity, and the fact that folks like Valero were scooping up production plants as the startups teetered on the edge of bankruptcy doesn’t change the fact that production capacity is quite high — the fact that consumption of ethanol might climb considerably under new rules is not exactly a secret to anyone, but there are certainly those who think that profit margins for ethanol companies might fall considerably thanks, in part, to oversupply (ethanol production recently hit an all-time high, though it does have strong seasonal trends).
And of course, there’s also the perennial “abolish the subsidy” debate (as in this note today from a Forbes blogger), or the “remove the import tax” debate (which would allow much more Brazilian sugarcane ethanol into our market). So as usual, there are a lot of moving parts in the ethanol business, largely because it is so completely intertwined with farm policy, electoral politics, green energy, and the oil business.
That means you certainly have to figure in a discount for any ethanol stock to account for the increased risk of owning a stock that is almost wholly dependent on government policies that can always change — whether or not the current discount is a fair one is up to you to decide. If you’re a fan of GPRE or any of the other remaining stocks, please let us know with a comment below (the big corn ethanol stalwarts that tend to be less volatile, by the way, are ADM and The Andersons (ANDE), though both have much more varied businesses — so either of those could potentially be a “safer” play on another ethanol boom).
And if you’ve ever subscribed to Zambell’s Buried Treasure Under $10 newsletter, please let us know what you thought by clicking here to review it over at Stock Gumshoe Reviews. Thanks!