Ethanol: Down But Not Out (Part One)

With the transportation sector accounting for two-thirds of our nation's oil consumption and one-third of our greenhouse gas emissions, developing an alternative fuel for transportation represents a tremendous market opportunity.  Not only would alternative fuel dramatically reduce our dependence on foreign oil, but it would also make significant strides in neutralizing the effects of global warming. In response to this opportunity, the science and business sectors have teamed up with the agricultural community to ramp up production of ethanol and biodiesel, proven substitutes for conventional fuels.  Domestic annual capacity is currently around 6 billion gallons, and the Mandatory Fuels Standard set by President Bush in his 2007 State of the Union address calls for that number to reach 35 billion gallons by 2017.  Additionally, newly elected House Speaker Nancy Pelosi is seeking to repeal the tax breaks for oil drilling and apply them to biofuels.  In turn, the goal is to decrease gasoline consumption by 20% over the next ten years.

With ethanol comprising approximately 90% of the current biofuels capacity, it appears that the industry is poised for some explosive growth.  This may be true, though Wall Street seems to have a negative impression on pure-play ethanol stocks.  Aventine Renewable Energy (AVR), Pacific Ethanol (PEIX), and VeraSun Energy (VSE) all went public in the last two years and are all trading at least 40% down from their peaks set last year.  So why is this? Could they all be undervalued and thus represent bargains?

Probably not.  The challenges to the industry are quite daunting, and the share price performance seems to reflect that in investor's eyes. Stayed tuned for more on this matter, as well as what we can look forward to.