Hi all,I'm not on the same page with you on ethanol and PEIX's future, with my reasoning and analysis below. Pacific EthanolMarket Cap: $568.78M (what investors are valuing it at)Okay, so Pacific Ethanol has once been valued quite a bit above $1 billion, but I think they are still extremely overvalued. Investors are valuing them at $568 million when:~ They have only $48,185 million in assets (priced very highly above assets)~ They lost nearly $10 million in 2005, declining from a positive $1.2 million in in 2002~ The company sold just under $20 million of stock (This is the only place they are getting money from right now)~ They have a profit margin of -4.64%, operating margin of -5.09%, ROA of -2.95%, and an ROE of -4.69% (this means they aren't managing money well, aren't keeping costs down, and they are racking up debt fast)~ Liabilities have rocketed from $1.2 million in 2002 to $19.669 million in 2005Do I really need to go any further into this? PEIX has almost nothing behind its valuation, and it is being valued highly with negative margins, rapidly increasing liabilities, selling a good amount of stock, and the most important thing of all: They are losing more and more money every year, even with revenue increasing so much, because they have a product that costs a ton to produce. Is there still interest in the company because Bill Gates invested $70 million or so into it? Well, first things first, just Bill Gates has gone into it doesn't mean it is a good investment; and second, I just thought I'd mention that if that $70 million investment were to go to zero, he'd lose only a little more than 1% of his net worth. So, it'd be similar to me putting $40 or so into PEIX and seeing it go to zero. All I'm saying is that Bill Gates isn't that great of a reason to invest in PEIX (analysts have been giving it out as a reason to). Anyway, I really don't see how they are not overvalued. The ethanol market is way too overhyped, you can tell this by the increasing amounts of IPOs from little, unexperienced companies (sign of confidence, which isn't a good long-term sign, see http://www.bloggingstocks.com/2006/07/28/the-ipo-situation/), because they know they can make some quick money from investors who don't look at the facts. Ethanol, particularly E85, is overwhelmingly overhyped, because there is no way corn can solve our energy problems. Right now, pretty much all types of ethanol are too expensive to produce and be profitable with it, but people haven't realized it yet. Something worth mentioning is that Consumer Reports did a report on E85 in their latest issue, and they clearly showed why ethanol costs more to fill up with (its MPG is much, much worse than gasoline's, making it more expensive when you add it up), and they also noted that there is barely enough corn in the U.S. to make up the demand for E10. Look at the facts, and you'll notice this is a different company than people are making it out to be. So, there you have it. I haven't seen any good, legit reasons with facts to know why PEIX should be around in 5-10 years, but I'd be happy to hear the views of others. And don't get me wrong, I think the alternative energy push is a good one, but with ethanol, too much is being put into something that will give too little in return, and that's where my view is coming from. I think this first breed of companies will suffer in the long-term, but over the next 20-30 years I think this could become an industry with something behind, just not with these companies. Best,David K
Thanks for the analysis, David.I seem to recall that the company projected being profitable starting with their November '06 10Q filing, but I couldn't find a link that substantiated that. The recent drop in crude prices probably won't help PEIX at all, either.I don't think production/consumption of E-85 is the only consideration, though. There is also the fact that they need to use ethanol as a summer additive to regular gasoline since Big Oil decided to phase out MBTE. How much this helps the ethanol producers is murky right now (we'll know with their next quarterly statements, I suppose, since the end of summer-additive season was a week or so ago).As for the cash-burning-- they have built new refineries this year, so that should help them grow sales to (hopefully) keep up with the cap ex.That said, I have cashed out on most of my PEIX position (sheer luck-- I think I actually sold on the all-time high) and would not consider buying more until they make real profits so I can evaluate them better.--JGBFoolps-- I hope that they improve the technology for getting ethanol from sources other than corn, so that I can have more of the drinkable corn ethanol in the form of Gentleman Jack ("...all the folks on Rocky Top get their corn from a jar").
Another thing I meant to mention but forgot-- insiders have been selling like crazy, all the way down to the $16.24 to $16.94 range. They have unloaded 27.6% of their holdings in the last 6 months according to yahoofinance.http://finance.yahoo.com/q/it?s=PEIX
Hi JBG,I don't think taking the company's advice with a profitability forecast is a good idea, because these guys don't know how to manage money all that well, so a forecast like that should not be taken very seriously, in my opinion. All PEIX is doing is building more debt and costs, two things they can't manage. People still don't address the fact that corn ethanol takes more energy more to produce than E85 can give back, and that's a major reason for me wondering how the heck people like the current corn ethanol idea. You can see it for yourself with pretty much any ethanol company out there: the costs can't be paid off easily. Maybe PEIX can get on their feet, but right now investors are expecting way, way too much, and I think even a 50% drop wouldn't bring PEIX to a reasonable value. There just isn't the potential with ethanol (at least the kind people are hyping left and right) that people think it has, and it's brought these ethanol companies to very high, and in my opinion, overvalued values. And do people even realize that ethanol costs more money to run your vehicle? E85 gets crummy mileage, and the overall costs adds up to quite a bit more than gasoline, especially now that gasoline prices have dropped. In this case, the consumers aren't paying attention either. But even with this fact that has been shown many times, E85 still gets national attention, hyped, politicians use it to get "higher ratings", and farmers are now spending huge amounts of money and time to plant more corn. What happens if next year's corn crop doesn't do well (corn was one of the few crops to do okay this year)? Then you've got yourself farmers with huge amounts of debt and damages, ethanol plants with no corn (even though there pretty much isn't enough for them now), and small companies with huge amounts of debt because of rapid, careless expansion and spending. Too much is being relied on something that is very volatile -- a crop. I can't imagine relying on corn for fuel, but people think it's going to be huge in the future. I still haven't figured out why. Now, you might be saying, "Sure, this could be true, but it is one step toward lowering our dependence on oil." Very true. Then why, may I ask, are billions going into E85 expansion? Why are farmers spending more time planting corn, why are billions being invested into it, and why are smaller companies ranking in the debt to build ethanol plants? It is being treated like anything but something small and "one step toward lower oil dependence." It's been overdone. Farmers have overdone it. Companies have overdone it. And as usual, the stock market caught on and now investors have overdone it. Too much with too little to come out of it, that's the quickest way I can sum it up. Best,David K
Ykes,You're right. I'm not ususally overly concerned about most inside sales, but this is quite a story. While I support entrepreneurs 'cashing in', PEIX is still a baby company -- with no real accomplishment yet. If the future is bright, why would there be so much selling? (Much is not 'planned' -- but open market sales.) I'm wondering what director Jones did to be awarded a nifty 2.5MM shares!??? Interesting that he has been steadily selling since the top last spring. This does not look good.While we all know that alternative energy is in the dumper right now, the story of Ethanol still is promising. Oil is going through a extremely lucky spell that will not last. The middle east has too much vested interest in selling at prices > $60 -- they will not let the market tank. One major disruption and oil goes back up -- pulling alternatives with it. I can't believe that Bill Gates was being altruistic with his investment -- this was not made in his charity.Prosperous Investing...Don
But, you need to remember that the majority of the ethanol that PEIX hopes to produce is destined to replace the MTBE in CA's gasoline, not become E85. Also, for a more recent study on the energy balance of ethanol, this makes an interesting read. http://www.transportation.anl.gov/pdfs/AF/265.pdfI'm not saying that PEIX is currently a good investment beyond speculation, but if they can get the process refined (no pun intended,) I don't see corn crops (or weather) being a whole lot more volatile than half of the OPEC member nations.
Still following PEIX? Great post citing the study proving a positive energy conversion rate.I haven't completed my work, but it looks like PEIX has an edge by carefully choosing their locations -- and having a history of marketing ethanol themselves.Take carep.s. I had a code3 nickname at one time also
I sold my shares this past April after corn futures continued to squeeze margins. I've only peeked now and then at the share price and watched it decline. FWIW, I still think they're geographic location will benefit them in the long run and S&P rates it a hold with a 12 month target price of $14.
c3TJ --Good timing on your sale! Fortunately I did my standard trimming on the way up, but still held a little during the slide. Recently bought a little more. Unless a new MTBE replacement comes along, it looks like a good long-term hold.I have a little info on VRNM, DIL and STKL if you have not already checked them out. Take care.
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