VeraSun paying stock for USBioenergy in ethanol merger

Thursday November 29, 2007 • Leave a Comment

VeraSun paying stock for USBioenergy in ethanol merger - MarketWatch

VeraSun (VSE: 6.19 -0.01 -0.16%) is buying U.S. Bioenergy (USBE: 0.00 N/A N/A) in an all stock purchase, paying .81 shares of VSE stock for each share of USBE, a premium of 11%. The value of the deal is about $700 million and will put VeraSun on par with ADM (ADM: 43.35 -0.03 -0.07%) as the leaders in ethanol production. Earlier this year VSE bought ASA Alliance Biofuels for $725 million.

VeraSun will have production capacity of 1.6 billion gallons of ethanol by the end of 2008. The combined company will have nine ethanol plants and seven under construction.

This is an important event in the ethanol industry. VeraSun has been committed to it’s goal to become a large scale, low cost ethanol producer. I think this merger will make VSE too big for another company (ADM) to buy and leave them free to work on there growth plans. I see several positives for VeraSun in this move.

First, economies of scale. The ethanol industry has very tight margins now, and VSE and USBE were the most profitable in this sector. This merger should improve the profitability of the resulting company.
Second, growth can continue. With seven plants under construction, the new VeraSun will continue to grow revenues and profits.
Finally, it appears VeraSun is buying up the competition at near the bottom of the market. Future profitability will be significantly magnified when commodity prices turn in the favor of ethanol.

In the same news block at MarketWatch is the story about the fire on an oil pipeline from Canada that provides 20% of U.S. oil imports from Canada. This can only be good news for domestic fuel production, such as ethanol.

VeraSun is a component of my hypothetical 20 Stock Portfolio, and I think today’s news is definitely a positive for the company.

I do not own any shares of VSE at this time.

Ethanol stock roundup

Tuesday November 27, 2007 • Leave a Comment

I like these interactive stock charts from Yahoo. Click on the symbol to see the chart for the individual stock.

&amp;amp;amp;amp;amp;amp;amp;amp;lt;a href=”http://finance.yahoo.com”&amp;amp;amp;amp;amp;amp;amp;amp;gt;Yahoo! Finance&amp;amp;amp;amp;amp;amp;amp;amp;lt;/a&amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;lt;br /&amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;lt;a href=”http://finance.yahoo.com/q?s=ADM”&amp;amp;amp;amp;amp;amp;amp;amp;gt;Quote for ADM&amp;amp;amp;amp;amp;amp;amp;amp;lt;/a&amp;amp;amp;amp;amp;amp;amp;amp;gt;

All of the companies listed besides Archer Daniels Midland (ADM: 43.35 -0.03 -0.07%) are pure ethanol plays. ADM is the 800 lb. gorilla in all things agricultural, including ethanol, with a $22 billion market cap. If the ethanol market started consolidating, I assume ADM would be buying.

Recent news has ethanol prices starting to rise and indicate that production of cellulosic ethanol (corn ethanol bad!, cellulose ethanol good!) in meaningful quantities is up to a decade away may indicate a turning point for these ethanol producers. As a renewable vehicle fuel, ethanol will remain the only meaningful player for quite a few years, and the political and public opinion are strongly in favor of as much renewable energy as possible. Ten percent ethanol gasoline will become the standard for most of the nation in the next couple of years, boosting demand. Hopefully, boosting it enough to keep up with all of the planned production!

Of the pure play ethanol companies, all managed to stay profitable for the difficult 3rd quarter except Pacific Ethanol (PIEX: 0.00 N/A N/A). On this site, VeraSun Energy (VSE: 6.19 -0.01 -0.16%) is a component of the 20 Stock Portfolio.

I do not think there is any rush to buy ethanol stocks now, but I do believe there is excellent potential for the next several years. Waiting until quarterly reports show corn/ethanol margins improving would be prudent. If you are research oriented, watching the individual corn and ethanol prices could give an early signal that margins will be improving for these companies. A few quarters of tight margins will also cause the better run companies to improve their efficiencies, thus boosting margins when the commodity prices turn in their favor.

Simple Categories to help define my process

Saturday November 24, 2007 • Leave a Comment

As I have written articles for this blog, my personal investment criteria have evolved and changed. I have discovered the types of companies that interest me as investments and subjects to write about. I do not manage money for anyone and want my personal stock accounts to reflect my philosophy and views. Through the research I have done here, I have found there are a few areas that I prefer to focus on. Here they are:

Income stocks: I am very interested in stocks that pay large dividends. I like getting the cash to put back to work. Short term stock prices reflect a lot of fears about a company that may affect the stock price, but the dividend can still provide a balance to the return.

Small cap stocks. For me, this is companies with a market capitalization of less than about $2 billion. Small caps have more room for multiples of the initial investment returns. They are also less analyzed, and often inaccurately, by the Wall Street analysts.

International and emerging markets. The U.S. is a very competitive place, and if a company has a really good, really profitable idea, competition will soon follow. In many other countries a good company with a good business can stay that way for years with little or no competition.

That about covers the types of companies I am looking for. I then try to find those that have something that sets them apart and will allow continued and growing profitability. It is a fairly simple idea, but I put a lot of work into digging into whatever I can find about a stock that catches my eye.

Back to the title of this post, I have simplified my category list to more closely align with the bullets listed above. The 20 Stock Articles page on this site give a listing of selected posts by their categories. I believe it is a good way to get an overview about what is going on here.

KHD Humbolt Wedag International completes transition

Saturday November 24, 2007 • Leave a Comment

KHD Humboldt Wedag International, Ltd. (KHD: 31.1699 +0.2799 +0.91%) has spent two years transforming itself from a financial services company into a global infrastructure company. Prior to November 1, 2005 the company was known as MFC Bancorp. The transition was completed in the 3rd quarter and now the company is focused on their core business of (from their website):

” supplying proprietary technologies, equipment and engineering/design services for cement, coal and minerals processing. KHD through its subsidiaries offers their clients all over the world engineering services, machinery, plant and processes as well as process automation, installation and commissioning. The services include staff training as well as pre- and after-sales services through to feasibility studies and financing concepts. This array of supplies and services includes, in particular, the modernization of existing facilities for capacity increases and, for reducing the specific energy demand and the burden on the environment.”

This stock interests me for several reasons:

First, KHD’s primary markets are Asia, Russia and eastern Europe. It also does business in the Middle East and Africa. All are strong growth areas for infrastructure.

Second, revenues are earnings are growing at 50% to 100% rates over 2006 quarters and year to date. The company’s backlog of signed orders is also growing: on Sept. 30 the backlog was $762 million, by Nov. 14 it was up to $925 million. The company has done $420 million in revenue for the first 9 months of 2007.

Third, the company has a PE of 21 on trailing earnings and over $9 a share in cash. The stock is very fairly valued for this type of growth. I believe the transition from financial services has not yet been noticed by the general market.

Finally, the company is followed by very few analysts. Yahoo finance shows one, TradeKing has no earning estimates available, there is very little info out on the Internet about the company. So you have a $1 billion market cap, international stock doing infrastructure business in emerging markets, that hasn’t been discovered. Sounds to me like a recipe for some outstanding stock price appreciation.

I am adding (KHD: 31.1699 +0.2799 +0.91%) to my hypothetical 20 Stock Portfolio. I currently do not own shares of this stock.

Briefing.com President on recession and credit crunch

Wednesday November 21, 2007 • Leave a Comment

Dick Green, President of Briefing.com gives his reasons why the U.S. is not moving towards recession. I pulled the following quotes but read the entire letter.

“Of course, there is always the risk that conditions will change. Still, it has been two years since housing started lower and employment is still rising. It has been many months since banks knew of their asset problems and they are still making loans. It is our belief that neither a recession or classic credit crunch will develop. Fears are driving the market. Of course, fears count too, just as much as greed when the market is on a run. And we aren’t arguing for fighting the market. Fears could keep the market in check for quite a while, and will certainly lead to a high level of volatility.

However, investors should understand the facts. Once it becomes clear that there is no recession developing, and that the write-down of assets at financial institutions is not a reason to take all corporate values lower, the market will recover - somewhat.”

Briefing.com: Page One

Thanks to Jeff at A Dash of Insight for the link.

VeraSun Energy - Q3 Update

Saturday November 17, 2007 • Leave a Comment

VeraSun Energy (VSE: 6.19 -0.01 -0.16%) is the largest pure play ethanol producer. Ethanol producers have taken a hit due to the double whammy of lower ethanol prices and higher corn prices. VeraSun did manage to stay in the green with a 7 cent per share profit, but things are definitely tough in the corn belt.

Here are the positive notes:

Production continues to grow up 77% YoY to 100 million gallons for the quarter.
Revenue was up 49%
Cash on hand is $320 million
4th quarter production will be 40 million gallons higher than Q3.

The negative factors:

Average corn cost $3.32 a bushel, up 62%
Average ethanol price: $1.96, down 17%
4th quarter corn and ethanol prices are on track to slightly worse than Q3.

Next some trends and projections concerning the future for VSE:

Production and revenues for VSE will continue to grow strongly towards the 1 billion gallon annual production goal. VeraSun is selling all it produces.
4th quarter earnings will obviously be flat. The higher production and revenue will give some economies of scale, but the commodity prices are still unfavorable.
Gas stations offering VeraSun’s proprietary VE85 fuel grew 85% to 150. I believe more widespread availability of E85 is very important to the long term viability of ethanol as a fuel.
More states have, and additional ones will, mandate a 10% ethanol blend for regular gas to reduce carbon emissions and petroleum dependence. This could change the supply demand balance for ethanol towards higher prices.
$3.00 gas with $2.00 ethanol + tax credits makes blending economically attractive to fuel sellers.

An additional item from the quarterly report, VeraSun is developing the technology to extract corn oil as part of their process. Corn oil is forecast to add 15 cent profit to each gallon of ethanol. Two plants are gearing up for this technology to be operational in 2009. 15 cents times 200 million gallons of ethanol equals the $7.5 million additional profit per quarter or another 8-9 cents a share.

Bottom line ethanol is a commodity business and VeraSun needs prices to swing its way. Record corn prices will not stay that way indefinitely and ethanol is the only current way to significantly reduce our dependence on carbon fuels. I think in a few quarters the ratio of ethanol and corn prices will correct and VeraSun with growing production will show profitability to go with the revenues.

VeraSun Energy (VSE: 6.19 -0.01 -0.16%) is a component of this blog’s 20 Stock Portfolio. I do not currently own any VSE.