After its shares debuted at $23 in its IPO in June and quickly shot to $30, VeraSun's (NYSE:VSE) share price sank faster than the price of a barrel of oil in recent months. VeraSun, the second-largest ethanol producer in the country after Archer Daniels Midland (NYSE:ADM), is now trading for $17.
Late last week, though, the company unveiled some news that could halt the drop. It said it plans to begin producing biodiesel and was evaluating a location for a large-scale biodiesel facility capable of producing 30 million gallons a year.
This is good news for investors for a couple of reasons. First, by expanding into biodiesel, VeraSun naturally diversifies itself. Ethanol was the darling of Wall Street earlier this year, but it has hit hard times as the price of oil has declined.
Second, the move puts VeraSun in a market that is ripe for extraordinary growth.
A few weeks ago, I wrote about how Archer Daniels Midland's investment in biodiesel stood to pay off because of how the Environmental Protection Agency's new, tighter regulations on sulfur emission from diesel fuel could increase the demand for biodiesel -- which meets the new, lower sulfur requirements.
Demand for biodiesel will also likely surge as DaimlerChrysler (NYSE:DCX), Honda (NYSE:HMC), and General Motors (NYSE:GM) begin manufacturing automobiles capable of running on diesel. All three are expected to have such vehicles on the road by 2009. According to the Energy Information Administration, the new emission standards and the number of new diesel-capable vehicles could increase demand to more than 1 billion gallons a year by 2010.
One more reason the plan could benefit VeraSun is because the company plans to produce some of the biodiesel from the oil from distillers' grain -- a waste product of the ethanol production process. In essence, the company will be using the same corn that makes the ethanol to make the biodiesel.
VeraSun is diversifying its energy portfolio, moving into a larger market, and making better use of its resources. All are positive developments that should provide the company a sturdier foundation for future growth.
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Having gone to college in Iowa, Fool contributor Jack Uldrich has long been a fan of corn. He does not own stock in any of the companies mentioned in this article. The Fool has a strict disclosure policy.
