Ethanol Redux
Jun 12th, 2006 | By Greg Guenthner | Category: Commodities, Energy, Investing StrategiesThe first half of 2006 has been generous to ethanol stocks. Even during the ups and downs of the recent nervous market, these alternative energy outfits have preserved much of their earlier gains and continue to grab investors’ attention.
I first began writing to you about ethanol’s potential back in mid-March. And I listed three companies that were set to benefit as ethanol fuels and blends became more prevalent (and all the attention ethanol has been getting from politicians and the media didn’t hurt, either).
So after only three short months, let’s check out some of these fast-movers:
O2Diesel Corporation (OTD:AMEX)
O2Diesel develops additive products that help fuels burn cleaner by adding ethanol. O2Diesel’s main product is called O2D05 — a fuel additive that can be made from soybean oil, vegetable oil or animal fats. It is designed to stabilize the blending of fuel grade ethanol with diesel fuel, with the end result being a clean burning fuel called O2Diesel.
When I first wrote about O2Diesel, it was trading for $0.64 a share. It spiked at $2.82 in early April and has settled at $1.25 before the bell today. The company said it more than doubled revenues from sales of its fuel additives during the first quarter, reporting $38,125 compared to $15,244 for first quarter 2005.
However, the company is still operating in the red, reporting a first quarter net loss of $1.7 million, or $0.04 per share. First quarter 2005 also saw a net loss of $1.7 million, which translated to $0.06 per share.
More news from the first quarter: O2Diesel is finding new markets for its additives, shipping its first bulk order to Australia. Alan Rae, CEO of O2Diesel, said in a statement that “many of our early adoptive partners have eclipsed the one-year anniversary since switching to O2Diesel’s fuel,” thus building credibility of O2Diesel’s additive as a viable alternative.
Pacific Ethanol Inc. (PEIX:NASDAQ)
Pacific Ethanol makes corn-based ethanol, and also sells products generated from the manufacture of ethanol, such as grain and carbon dioxide. Pacific sells its ethanol through its fuel-marketing subsidiary, Kinergy Marketing.
When I first mentioned the company, it’s share price was $19. It has since climbed as high as $42, and has since corrected to $24.91 before today’s opening bell.
Shares of Pacific took a big hit late last month after the company signed off on the sale of 5.5 million shares of the stock totaling $145 million. According to a news report, Pacific Ethanol will use the cash to speed up work on five ethanol production facilities.
Shares of the company popped again as recently as last week after an analyst said the company is well positioned for growth. Then the analyst initiated his coverage with a “buy” rating, saying “the company is poised to benefit from new interest in ethanol production, and has secured enough financing to reach its growth targets,” according to the Associated Press.
Soleil Securities analyst Ian Horowitz set the long-term target price for Pacific Ethanol at $34 a share.
And while I wrote to you about Pacific Ethanol in March, you may have caught wind of the name in November 2005, when billionaire Microsoft founder Bill Gates announced his investment company was going to plunk down $84 million in Pacific Ethanol. According to several media outlets, the money will help pay for new fuel additive plants.
MGP Ingredients Inc. (MGPI:NASDAQ)
MGP Ingredients distills wheat starches and wheat proteins for vital wheat gluten and mill feeds. The company makes alcohol used in beverages and industrial alcohol — like ethanol. Like Pacific Ethanol, MGP also deals in the grain and carbon dioxide byproducts of its distillery operations.
MGP was trading at approximately $14.40 when I wrote about it three months ago. Since then, it has closed as high as $34.05 and settled to $26.15 before this morning’s bell.
In its most recent quarter, MGP reported net income of $2.1 million ($0.12 per share) –up from the $1.6 million ($0.10 per share) reported a year ago. Despite this growth, MGP did not meet analyst’s expectations, which were set at $0.14 a share.
And while revenue was up 12% to $79.4 million, distillery products sales grew 22% percent to $10.2 million, according to the Associated Press.
And MGP’s management has said it expects the company will charge higher prices for its products while paying lower prices for natural gas during the next quarter. Because of this, they are expecting operating income totaling at least as much as during the previous three quarters combined. Talk about a serious growth opportunity…
No Guarantees
I’m going to shift gears here to answer an important question I received from a reader about one of the companies I’ve been talking about here in The Sleuth. He wrote in to ask about Genta Inc. (GNTA: NASDAQ) and its chemotherapy-aiding drug Genasense. “How do you know the FDA will approve the drug this time since it was rejected once before?” he asked.
The long answer: Genta applied to have Genasense approved once before, but only for certain types of melanoma. Now the application is seeking approval of the drug for use in patients with relapsed or refractory chronic lymphocytic leukemia.
And more importantly, a new trial was released that showed 17 percent of those on Genasense achieved complete or partial remission, while only seven percent of patients who were administered chemotherapy did. Those who were given Genasense also were in remission longer.
However, I believe my short answer to this question is more important: I don’t know whether the FDA will approve the drug this time around. This is what makes Genta the speculative stock that it is.
Countless events could happen between now and October (when the FDA is expected to make a decision on the drug) that could lift Genasense’s reputation as a great cancer drug, or completely destroy its chances of ever being marketed. For instance, new trial results could emerge that would force the company to drop the drug entirely. That is a risk you take if you choose to own shares of this small pharmaceutical.
Until next week,
Gunner
June 12, 2006
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