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Why Pacific Ethanol Stock Plunged 16% This Morning

By Rich Smith - Updated Aug 13, 2020 at 10:34AM

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Pacific Ethanol stock quintupled in 2020. Maybe a bit of profit-taking is in order?

What happened

If you haven't noticed it yet, Pacific Ethanol (ALTO 2.86%) stock is on kind of a tear. Year to date, shares of the alternative-to-gasoline fuel maker have quintupled, booking a fivefold gain from $0.81 per share at the beginning of this year to surge past $4 a share by close of trading Wednesday.

Today, however, Pacific Ethanol is down heavily. Early in the morning, the stock lost more than 16%. It's pared those losses as the day has worn on, but at a recent share price of $3.85, the stock is still down 5.2% in 10:50 a.m. trading.

Woman dispenses hand sanitizer from a bottle.

Image source: Getty Images.

So what

Why the sudden sell-off? It's certainly not because of earnings. Pacific Ethanol released its Q2 2020 results on Tuesday, and while quarterly sales might have slumped during the Great Shutdown (down 39% year over year), Pacific Ethanol nonetheless managed to improve its profits dramatically. The company reported a $0.27-per-share net profit for the quarter versus the $0.17 net loss it recorded a year ago -- and versus the $0.20 per share loss Wall Street had predicted.

This was, by the way, Pacific Ethanol's first reported quarterly profit in more than three years. Turns out, while producing ethanol as an additive to gasoline in the middle of a recession might not be the best business model, producing ethanol for use as ethanol -- alcohol that can be used in sanitizers and disinfectants -- is a downright terrific business to be in in the middle of a pandemic.

During the quarter, Pacific Ethanol "expanded production of high quality alcohol" for these purposes to meet demand that "increased significantly due to the ongoing coronavirus pandemic."

Now what

Mind you, Pacific Ethanol isn't entirely out of the woods yet -- and this might be why investors are choosing to take the money and run this morning. The company's long history of losing money implies that, absent a pandemic, the ethanol business probably isn't a great one to be in.

Still, the surge in new cash coming into Pacific Ethanol's coffers enabled the company to pay down $34 million in debt in Q2. If the pandemic and the flood of cash continue, Pacific Ethanol says it's on track "to reduce our total term debt outstanding at year end by at least $70 million" -- cutting its debt load in half in the space of a single year.

The more debt Pacific Ethanol pays down now, when times are good, the more chances the company will be able to remain profitable in the future, when things get back to normal.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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