Ethanol Stocks Keep Falling

Cascade Investment to sell its shares of Pacific Ethanol as biofuel analysts downgrade and profits miss expectations. Margins could get worse before they get better, industry watchers say.

Ethanol stocks are taking a beating from investors Monday after a story that Cascade Investment, an investment company owned by Microsoft chairman Bill Gates, is preparing to sell its 21-percent stake in Pacific Ethanol.

The Bloomberg article, which referred to a Pacific Ethanol filing with the U.S. Securities and Exchange Commission, said Gates had lost $24 million, as of Friday, on the original $84 million investment in 2005.

Pacific Ethanol (NSDQ: PEIX) dropped 22.3 percent to $4.43 per share Monday from a previous 52-week low of $5.70 per share, set Friday. The price is off 77.3 percent from the stock's 52-week high of $19.54 per share in November 2006.

The company earlier this month announced a third-quarter net loss of $4.8 million, or 15 cents per share, compared with a net income of $3.8 million, or 7 cents per share, for the year-ago quarter, in spite of sales that nearly doubled to $118.1 million from $61.1 million.

The news supports a prediction that Anup Jacob, a partner at Virgin Green Fund, made at the Dow Jones Alternative Energy Innovations conference in October.

"I think that we will see a lot of retrades below the pricing cost over the next little bit here," he said (see Ethanol's Tough Times Continue).

Pacific Ethanol is not the only company to suffer.

Aventine Renewable Energy Holdings (NYSE: AVR) is down 9.45 percent to $8.43 per share Monday, a 68.2-percent fall from its 52-week high of $26.49 per share in November of last year. VeraSun Energy Corp. (NYSE: VSE) is down 7.23 percent Monday to $10.26 per share, off 61.9 percent from its 52-week high of $26.90 per share last November.

And Verenium Corp. (NSDQ: VRNM), US BioEnergy Corp. (NSDQ: USBE) and Archer Daniels Midland Co. (NYSE: ADM) also are trading down, as are others.

In addition to the Cascade news, ethanol companies have reported lower-than-expected profits in the previous weeks and analysts have been downgrading the stocks.

To name just a few examples, a research note from Goldman Sachs analyst Arjun Mutri forecast a "bearish margin outlook" for next year and Soleil Securities Group analyst Ian Horowitz downgraded Aventine, Pacific Ethanol and VeraSun.

Rick Kment, a biofuels analyst with research firm DTN, said the latest drop in ethanol stocks is no surprise.

"A lot of this is really just people realizing what's happening," he said. "This might cause a little bit of shakeout, but I don't know if going to impact the industry as a whole. Most of these companies know [lower profits are] coming down the line, when it comes down to reporting."

Ethanol companies have seen shrinking margins as prices for the fuel have dropped while prices for the crops used to make ethanol have grown (see Ethanol's Tough Times Continue, Ethanol Margins Suffer, In Brief: Biofuels Get Boost During Tough Times, In Brief: Ethanol Could Strain U.S. Water Resources, In Brief: Biofuels Get Funding as an Ethanol Plant Gets Canceled).

As more ethanol production has come online, sales have grown, but have not kept pace with production, according to the companies.

For instance, VeraSun last week posted a net income of $7.8 million, or 9 cents per share, down 75.6 percent from $32 million, or 40 cents per share, in the third quarter of 2006 even as its revenue grew 49.7 percent. The company said its ethanol production grew 77.4 percent, exceeding the pace of sales that grew 69 percent. In October, VeraSun postponed plans to grow its production capacity further (see Ethanol Margins Suffer).

Kment said the industry can expect to see more of the same bad news in the next few months.

"[The market] is probably going to remain relatively tight through the first part of 2008," he said. "Profitability is going to remain tight for major ethanol producers as new plants are coming online and have come online in the last six months to a year."