Another Ethanol Player Turns Profitable

Since they went public, shareholders of U.S. BioEnergy (Nasdaq: USBE  ) , VeraSun Energy (NYSE: VSE  ) , and Aventine Renewable Energy Holdings (NYSE: AVR  ) have had some tough sledding. The volatility in these stocks has been fueled by the uncertainty surrounding future demand for ethanol, risk of higher corn prices, and concerns over long-term profitability for the major players in the market.

On Friday, U.S. BioEnergy announced net income for its full-year 2006 of $0.41 per share, with $0.35 per share being attributable to its most recent fourth quarter. This swing to profitability was welcome news for its shareholders. It also comes on the heels of a string of consecutive quarters of profitability by both Aventine and VeraSun, lending further credence to the argument that ethanol may not be a failed endeavor.

Prior to May 2006, U.S. BioEnergy derived its revenue primarily from its marketing and services business. A key driver in the company's shift to profitability is that since that time the sale of ethanol and distillers grains has become its primary source of income, and U.S. BioEnergy significantly ramped up its production of ethanol in the second half of the year. The company also has four new facilities under construction that should all be operating by the end of next year. These new plants are expected to increase the company's production capacity by 140%.

One caveat that potential investors in U.S. BioEnergy should take into account is that the company noted in its earnings release that, due to the steep ramping in ethanol production that took place in 2006, the actual production figures for 2006 are not indicative of future operating results.

The ethanol industry got a big boost on Friday from a U.S. Department of Agriculture report stating that corn planting will be up 15% this year to 90.5 million acres, 12.1 million more acres than in 2006. The report also attributes part of the upward trend specifically to ethanol demand and notes that 2007 could be the biggest corn planting year since 1944 in terms of total acreage.

Fortunately, these companies are not dealing with a supply and demand relationship similar to that of OPEC and its petroleum consumers. Rather, it appears that the corn market is responding rather nicely to the growing production of ethanol and hopefully will enable the ethanol players to keep their costs in check. As evidenced by the last few quarters, these are still unproven stocks subject to quite a bit of volatility. However, the profitability experienced by these companies and the impact they are having on the corn market should go a long way toward establishing their credibility as long-term holdings.

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Fool contributor Billy Fisher does not own shares of the companies mentioned. The Fool has a strict disclosure policy.