Did This Refining Giant Just Give Investors a Hidden Message?

There has been a lot of naysayers on ethanol but rising margins and new feedstocks are hard to ignore which may bode very well for this industry player.

Feb 2, 2014 at 11:44AM

In case you missed it, Valero Energy's (NYSE:VLO) recent Q413 Interim Update gave a strong hint that the ethanol industry will see operating income that will be "significantly higher" in Q413 vs Q412 thanks to higher gross margins and production volumes. The positive view of its ethanol business didn't seem to hit many investors' radars, who were focused on Davos and watching a general sell-off in the market. Now that Valero released its Q413 earnings and showed a whopping 214% rise in earned operating income ($269 million) for the quarter, this may open a window for those interested in buying shares of Pacific Ethanol (NASDAQ:PEIX), a name that fell over 20% in recent trading thanks to a rally in natural gas, a chief component in producing ethanol. 

The pullback in shares of Pacific Ethanol now have my interest from a valuation perspective, especially since the company's plants don't consume as much ethanol as competitors because of proximity of plants to customers and the fact that ethanol the company does produce is a lower-carbon transportation fuel (something important to keep in mind after Obama's State of the Union address). Additionally, the company has trimmed debt by retiring $14 million in convertible notes and management has stated that they are seeing more global demand for ethanol globally.

I think at a time when people tend to question where the feedstock comes from to produce ethanol, Pacific doesn't get enough recognition by the investing community for its ability to convert diverse feedstocks such as sugar, corn, sorghum, and even sugars to produce from cellulosic material. So, sounds like a buy at these levels huh? Maybe, but not so fast. According to the company's latest 10Q, "if the Company fails to make ongoing quarterly cash dividend payments, it will be in default under the terms of its agreements with the holders of its Series B Preferred Stock and the holders' current forbearance through March 31, 2015 will be ineffective. The Company could experience a material adverse effect on its liquidity if it is required to pay in cash the entire current balance of accrued and unpaid dividends."

Concerns related to patent violations don't seem valid at this time considering the company's technological process for corn oil separation does seem different than accusations suggest.

Therefore, for a company that was very optimistic about its future just two months ago, the recent haircut in shares of Pacific Ethanol may be a nice entry for patient longs regardless of concerns that ethanol derived from corn is driving up food prices and could damage rubber, plastic, and even some engines. Why? The company's dividend seems secure (at least for now) and the future of ethanol may have nothing to do with food. In fact, the education Pacific Ethanol is getting by using beet sugar as a feedstock may actually open the company up to a whole new opportunity to tap second generation biofuel feedstocks like switchgrass, stems, leaves, pulp and woodchips. 

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John Licata has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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