by bobwins | March 25, 2014 12:14 pm
It’s volatile. It’s already runup but I still think it has potential.
I got Pacific Ethanol, PEIX, from Keith Schaefer late last year. I had been taking his newsletter for over a year and ignored GPRE because it was an ethanol stock. When he recommended PEIX, I decided to look harder because GPRE had done very well. Turns out ethanol is fundamentally different in the near term. Corn has come way down from the peaks caused by the drought of 2012. Farmers responded, as they typically do, to the high prices of 2012 by planting record acreage of corn. Prices plummeted to below $4/bushell instead of $12/bushell during the drought. Corn is the principal ingredient to make ethanol so their COGS went down sharply. Ngas is also a primary cost of cooking the corn and it also dropped in the same time period. The result is a profitable ethanol sector in the refining business.
Current conditions are as good as they get for ethanol producers. The rail cars that Bakken producers are using to transport crude is also needed to transport ethanol. They are scarce. Most of the ethanol is produced in corn country. It’s having trouble getting to regional refineries. The bad weather hampered production of ethanol as some plants had to shut down for lack of ngas. Corn has started back up but ethanol, due to shipping and weather conditions, has gone up more. West Coast ethanol has been about $1/gallon more than Midwest ethanol for weeks.
PEIX is a small producer of 160million gallons per year but all four plants are in the West. The current pricing anomaly is giving them $1 more than Midwest producers. 40million gallons/qtr X $1 = $40million bucks that will drop to the bottom line if conditions stay the same all qtr. Share count was around 15million but recent price increases have put warrants into the money. Share count will likely be closer to 23million by year end as the warrants are counted in FD share count.
But for Q1, the share count will average closer to 18million shares and eps should be over $1. The stock is selling for $16.26 today. Q1 results should send the stock over $25. After that, they will restart their fourth plant in California to produce 200million gallons/yr and add growth for the remainder of 2014(and some risk of startup expenses hurting profits).
I bought stock in the mid 4’s when Schaefer recommended it. I also have options, due to my conviction that the profits were coming. Q4 2013 eps was .54 and the stock zoomed but I still think there is big upside. The refiners could follow Valero’s example. Their earnings were bolstered by ethanol while other refiners had shrinking margins.
This is a volatile stock and conditions like corn prices could turn on a dime but I think Q1 will deliver exceptional profits with room for improvement as the 4th plant comes online in Q2.
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