Pacific Ethanol: Not Dead Yet

It's true that I didn't hesitate to denigrate corn ethanol in the fall. I believe that was the right call. But more recently, I've argued that the demise of producers like VeraSun Energy (NYSE: VSE  ) has been greatly exaggerated.

Pacific Ethanol (Nasdaq: PEIX  ) is one company that had been hastily heaped onto the pile of corporate corpses. The earnings report released Monday sounded something like "I'm not dead yet!" -- and that startled some people. Shares are up more than 100% from their closing price on Friday.

If you back out the large impairment charge, Pacific Ethanol actually turned a profit in the first quarter. Gross margin came in at nearly 10%, better than VeraSun and roughly doubling the gross margin of Aventine Renewable Energy (NYSE: AVR  ) . Part of Pacific Ethanol's cost edge comes from the company's location near end markets for fuel, rather than corn fields. Until ethanol pipelines change the distribution landscape, it's cheaper to transport the corn in corn form.

It's no simple task to compare the performance of these ethanol players. Each company calculates its cost metrics in slightly different ways. Pacific Ethanol's reported commodity margin excludes the cost of energy inputs (i.e., natural gas), whereas VeraSun's "total crush margin" includes natural gas. Just make sure you're comparing apples to apples, or corn to corn, when you're contrasting these competitors.

Though they're not dead, I find it tough to get too worked up about this crop of ethanol producers. They're even more boxed in by input limitations than companies that refine oil, like Valero Energy (NYSE: VLO  ) and Marathon Oil (NYSE: MRO  ) , which can at least install equipment to process cheaper, lower-grade varieties of crude oil. Biofuel innovations will come in due time, but it's going to be a tough slog for the foreseeable future.

Pacific Ethanol is rated a measly one star in Motley Fool CAPS. Think it has finally turned the corner? Weigh in right here.

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3/27/2009 4:02 PM
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