In recent months, global warming resulting from CO2 emissions from fossil fuels has been gaining more and more attention in the public sphere. Paul A. Mayewski, an Earth sciences professor at the University of Maine, stated in a recent CBS 60 Minutes interview that "we haven't seen CO2 levels like this in hundreds of thousands of years, if not millions of years." This awareness has elicited an amplified demand for alternative fuels with lower levels of CO2 emissions. This is where ethanol comes into play.
Monday, VeraSun announced that its second-quarter earnings of $152.3 million had surpassed last year's second-quarter earnings of $34.5 million by $117.8 million, or 341.7%. These sales soundly beat analysts' expectations of $142.9 million. The increase swung the company from being $3.9 million in the red for 2005's Q2, to $19.6 million in the black for the 2006 Q2. It also set the stock ablaze; Vera Sun opened at $25.01 on Tuesday, 8.64% above Monday's close.
"We had a strong second quarter, as ethanol prices rose and many of our refiner customers converted to blending ethanol for its high octane and clean-burning characteristics," noted VeraSun Chairman and CEO Don Endres.
While this pure-play ethanol producer probably isn't for investors who don't have ice water in their veins, it does have a lot of promise for growth. VeraSun will definitely add some zing and volatility to your portfolio -- which could be good or bad, depending on your tolerance for volatility.
For its recent IPO in June, the stock opened at $28. Since then, it has steadily decreased to Friday's low of $21.53. This drop was likely due to investors who bought in on the hype but quickly realized that the stock wouldn't have a Googlesque run. Monday's earnings release, however, lends credence to the notion that there is money to be made in ethanol production. This company appears to have turned the corner.
VeraSun only has a market capitalization of $1.75 billion, compared to the $27.29 billion market cap of rival Archer Daniels Midland
There is certainly a place for VeraSun in the ethanol market. Environmental concerns have driven enormous demand for an increased shift to ethanol, led by the Federal Government, Ford
Fools should take into account additional risks associated with this investment. No one knows for certain when the government will mandate higher ethanol blend levels of gasoline for vehicles, or how well the automobile industry can adopt higher standards in terms of ethanol blend. Additionally, new competitors will be entering the public arena, with Aventine Renewable and Hawkeye Renewable preparing for IPOs. While the prospects for ethanol are exciting, Fools should do their own additional research and carefully consider their risk tolerance before diving in.
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