Sector Preview: Ethanol

July 25, 2006

Analysts Look for Stronger 2Q Profit From Ethanol Producers on Stronger Demand

NEW YORK (AP) — Ethanol has been hot both on Wall Street and in Washington recently, and analysts are forecasting stronger second-quarter results from producers.With Congress pushing ethanol and other renewable fuels as a gasoline additive, the industry has a guaranteed demand floor for its cleaner-burning fuel. But some analysts worry whether the industry is overbuilding capacity, which could flood the market and depress ethanol prices.

Two ethanol producers debuted on the New York Stock Exchange during the quarter, and their initial public offerings drew contrasting investor reaction. Brookings, S.D.-based VeraSun Energy Corp. (NYSE: VSE) saw its shares jump 30 percent after its June 14 IPO. The shares, initially priced at $23, closed their first day at $30.

Aventine Renewable Energy Holdings Inc. (NYSE:AVR), though, had a rougher introduction. Its shares fell nearly 11 percent from the $43 IPO price on June 29.

The industry’s biggest player remains agribusiness giant Archer Daniels Midlands Co., which will report earnings on July 28.

Wall Street is looking for ADM to report 52 cents in profit per share for the quarter, up from 30 cents last year, according to a Thomson Financial analyst poll.

Analysts are looking for even sharper gains at MPG Ingredients Inc., which makes ethanol as well as beverage alcohol used in vodka and other products, to post profit of 43 cents per share, up from 4 cents.

The ethanol market is fragmented, with ADM the only producer with double-digit market share, Merrill Lynch analyst Diane Geissler said in a research report. New players have been attracted to the industry by congressional interest in alternative fuels.

Geissler said some of these entrants — including farmer-owned co-ops — will make Congress more likely to continue support of credits for ethanol.

Some analysts, though, question whether all the new production coming online means the industry has already reached its peak margins.

After an international industry workshop in Milwaukee in mid-June, Bear Stearns analyst Ann Duignan said she noticed attendees seemed to recognize that rising corn prices and falling ethanol futures indicate tougher margins ahead.

Source: Yahoo

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