Is an ethanol bubble brewing?

Posted by: Aaron Pressman on April 04, 2006

Andersons Inc. (Symbol: ANDE) of Maumee, Ohio, was for years a sleepy agribusiness that bought and sold grain and ran grain elevators. Five or six years ago, a typical year was about $1 billion in revenue with the company’s total market value (including debt) of about one-third of that. From 1999 until last year, its P/E averaged less than 10. So why in just the past two months is the stock of this corn-fed Ohioan stronger than a country still full of moonshine? It’s the brewing ethanol bubble, I tell you.

Shares of Andersons are up 65% since January 31, the date of President Bush’s State of the Union address. What gives? It seems our friends in Ohio have got themselves a still. Well, an ethanol plant, really. Okay, three plants. And the president has been talking up ethanol like nobody’s business. Since the beginning of 2005, Andersons has invested $36 million for minority ownership in three ethanol plants being built in the Midwest. It will also obtain corn and help run the plants.

There are a couple of reasons to be skeptical about Andersons and the whole ethanol craze. I know, I know President George Bush’s energy plan said we needed to double our usage by 2012 to 7.5 billion gallons but the guy’s track record on predictions isn’t so stellar. More importantly, companies are building ethanol plants like mad. A study by the Renewable Fuels Association issued
in February
(PDF file) found 2.1 billion gallons of new capacity coming online soon and about another 4 billion within the next three years. When I read the study I was reminded of the admittedly much bigger boom in telecom spending that exploded after the 1996 Telecommunications Act. Little that the bill’s proponents expected came to pass, much to investors’ dismay.

Meanwhile in the real world, after a 33% jump in earnings per share last year, Andersons is projecting 2006 per share profits will be about even with 2005. The company also reported something you hate to see last year, increasing net income and EPS while cash flow from operations declined. The company said in its 10-K that changes in working capital, essentially in accounts receivable and payable, accounted for the drop. The company’s operations are also pretty complex with last year’s profit increase coming from a fast-growing side business that buys, sells and leases rail cars. Grain operations are hedged in the futures markets and it looks like one part of the cash flow change came from increased margin payments. All in all, it doesn'rt look like a rewarding situation.

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Reader Comments

Ethanol

May 9, 2006 08:46 PM

For more info on ethanol, visit:

http://www.ethanol-news.com

Waldemar

May 13, 2007 03:42 PM

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http://www.ethanol-news.de

TheSUBWAY.com

April 2, 2008 02:08 PM

We found an interesting article about the problems with Ethanol on ConsumerReports.org:

http://blogs.consumerreports.org/cars/2008/03/ethanol-e85.html

"But there are some problems with increasing ethanol blends. Ethanol contains less energy than gasoline, so increasing the amount of ethanol in gasoline will likely result in lower fuel economy. Increasing standard fuel blends from zero to 10 percent ethanol, as is happening today, has little or no impact on fuel economy. In tests, the differences occur within the margin of error, about 0.5 percent. Further increasing ethanol levels to 20 percent reduces fuel economy between 1 and 3 percent, according to testing by the DOE and General Motors. Evaluations are underway to determine if E20 will burn effectively in today's engines without impacting reliability and longevity, and also assessing potential impact on fuel economy."

TheSUBWAY.com would like to invite readers to post their own views and ideas in TheSUBWAY.com's Investor Forum:

http://www.thesubway.com/small-cap-forum

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