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 Can Ethanol Pump Up Investors' Returns? |
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ceo/cfo
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作者：ceo/cfo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
THURSDAY, FEBRUARY 9, 2006
By DIMITRA DEFOTIS
THE GRASS IS GETTING GREENER for ethanol, the alternative fuel that may offer investment opportunities in the coming years.
In his State of the Union address last week, President Bush talked up "cutting-edge methods of producing ethanol," because, as he put it, "America is addicted to oil."
Cellulosic ethanol, derived from wood chips, grass and other natural waste, is cheaper to produce than corn ethanol and could be at gas pumps within six years, the president said.
To process cellulosic ethanol, new enzymes, which act as fermentation agents, are being developed to cut costs and speed the creation of alcohol from grain.
Traditionally, Archer Daniels Midland has been the most popular way to play corn ethanol. But if ethanol demand takes off, some small biotechnology companies developing enzymes for cellulosic ethanol or energy firms involved in ethanol infrastructure also could benefit.
Pacific Ethanol, a Fresno, Calif.-based company that is building ethanol production and distribution facilities, recently got an $84 million cash infusion from Cascade Investment, which is owned by Microsoft's chairman, Bill Gates.
Diversa, headquartered in San Diego, is working with DuPont to develop enzymes for cellulosic ethanol.
"If we needed, in a crash program, to start generating a lot of ethanol, it could be done," says James Hansel, managing director of Eight Winds Capital Management, an investment advisor in Old Greenwich, Conn.
Ethanol production has more than doubled since 1999 to 4.3 million gallons annually, according to the Renewable Fuels Association.
Still, only about 3% of the gasoline consumed in the U.S was ethanol-based as of November 2005, according to the Energy Information Administration.
But at the average oil prices anticipated by the futures market this year -- near $65 per barrel -- developing ethanol infrastructure remains attractive.
Last year, private-equity firms nearly doubled the amount of money they invested in oil alternatives, to $181 million, according to a survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
"I think the demand for ethanol will increase in the next few years faster than the capacity to produce it," says Clinton Mayer, an analyst at brokerage firm Burnham Securities.
Mayer thinks Archer Daniels remains the best way to invest in ethanol, even though ethanol is only part of its business. ADM is among the world's largest grain processors.
The company said Thursday it is expanding its ethanol-production capacity in Nebraska; ADM's shares rose roughly 2%.
The stock fetches 17x estimated earnings for the next four quarters. While that's above its median forward price-to-earnings multiple during the past five years, it's below its peak multiple of 18.8x forward earnings, according to Thomson Financial/Baseline (see table).
Mayer says that as more corn crops are devoted to ethanol, less corn is available for ADM's high-fructose corn sweetener business. That should tighten sweetener supply and let ADM raise prices.
ADM's corn processing profits should increase over the next two quarters as it realizes ethanol and sweetener price increases, writes David Driscoll of Citigroup Research.
Beyond ADM, investors must look for smaller, riskier stocks to "play" the likely growth in ethanol consumption.
Hansel has been watching shares of Pacific Ethanol. The company, whose market capitalization is $480 million, is developing a distribution network to get ethanol to market, and it is producing ethanol with corn. But it is not profitable.
Pacific Ethanol trades at roughly 15 times book value and five times revenue, Hansel says.
Although those multiples sound high, he thinks the price could be fair if the case for ethanol's growth holds up.
"If we have an oil crisis, a company like this will become extremely valuable because they have a good position in the ethanol market," says Hansel, who says he doesn't own Pacific Ethanol shares.
While corn productivity is increasing, the U.S. cannot produce the 50 to 70 billion gallons of ethanol we need annually (from corn alone) to reduce our dependency on foreign oil, says Brent Erickson, executive vice president of the Biotechnology Industry Organization.
Diversa, a biotechnology company whose market value is $269 million, is working with DuPont to refine noncorn products into ethanol, and has developed a new enzyme that speeds corn ethanol processing.
It isn't profitable, either, and ethanol-related projects are only part of its business. But firms like Diversa that can "produce enzymes for cellulosic ethanol are positioned for significant growth," says Erickson.
Of course, while ethanol reduces carbon monoxide in the environment, its detractors say it can increase smog.
And although the president talked up ethanol, the actual money he wanted to set aside for research was small.
But when a Republican president and former oil man starts promoting the virtues of alternative fuels, change is clearly in the air.
ADM remains the safest way to invest in ethanol for most investors. For those who are more risk-tolerant, smaller companies like Diversa and Pacific Ethanol could help them see more than one kind of green.
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Fill 'Er Up: Ethanol Plays
Company Ticker Market Cap (millions) Price/Book Forward P/E Long-Term EPS Growth Revenue Growth 2007 vs 2006
Archer Daniels Midland ADM $20,000 2.2 17.7x 9% 2%
Diversa DVSA $264 2.2 NM 50% 37%
Pacific Ethanol PEIX $482 14.9 NM NM 60%
作者：ceo/cfo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 Can Ethanol Pump Up Investors' Returns? -- ceo/cfo - (5855 Byte) 2006-2-11 周六, 00:51 (673 reads)
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