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U.S. BioEnergy: Ethanol's Best Of Breed

Posted: Nov 26, 2007 12:30 PM by Wayne Pinsent

Tickers in this Article: ADM, VSE, AVR, PEIX, USBE

As part of our Green Investing Special Feature, I wrote an article covering ethanol stocks and the trouble they've had recently. However, one company, U.S. BioEnergy (Nasdaq:USBE), fell under my radar. The Minnesota-based ethanol producer seems to be the best value in the industry.

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After looking into the company and its peers, it is the only ethanol player I can really get behind. (To learn more, check out The Biofuels Debate Heats Up.)

Growing Corn and Earnings
In the article, I commented on Aventine Renewable Energy (NYSE:AVR), Pacific Ethanol (Nasdaq:PEIX), and VeraSun Energy (NYSE:VSE). The sector was looking pretty shaky when I wrote the article, and it has continued to do poorly during the month of November. Out of those three stocks, VeraSun has been the "best", now down about 20% during the past three months. (To read my initial article on ethanol producers, see Ethanol Stocks To Know.)

U.S. BioEnergy outshined them all, ending the month slightly up from its October 31 closing price. The company went public December last year, and recently released quarterly earnings that were fairly impressive. For its fiscal third quarter, it reported an increase in net income of 33% to $11.1 million (15 cents per share), compared to $8.3 million (12 cents per share) for the second quarter. This is all happened while quarterly revenues decreased slightly, showing that the company has been dramatically improving its profit margins.

Hedging its Bets
An interesting point of focus was the company's hedging activities and the effect this had on costs. The rising price of corn has been a huge weight on the ethanol industry and has been squeezing the producers. During its third quarter, U.S. BioEnergy did an impressive job of hedging and cut down its average cost of corn by 13.6% to $1.10, from $1.25 per gallon of ethanol. U.S. BioEnergy’s hedging effectiveness has been back and forth over the last four quarters, but overall it has helped the company to significantly reduce costs.

Positioning For Future Success
The ethanol industry has been hurting and is in need of consolidation to increase efficiency. U.S. BioEnergy has been leading in this regard, most recently in August with its acquisition of Millennium Ethanol, now called U.S. Bio Marion, for $133.3 million. The company is expanding rapidly. According to a Renewable Fuels Association (RFA) 2007 report, U.S. Bio is currently the largest pure-play ethanol producer, excluding Archer Daniels Midland (NYSE:ADM), churning out 250 million gallons per year.

That said, U.S. BioEnergy is not content with current levels of production. After fully integrating U.S. Bio Marion, the company will own and operate eight plants in six states and is expected to have total production capacity of 750 million gallons per year by the end of 2008.

Can U.S. BioEnergy Succeed?
In my other article, I went over the risks of ethanol that have been a huge strain on the industry, including competition from other renewable fuels, high corn prices, and the inability to transport ethanol through traditional oil pipelines. These risks remain, but the industry problems have been reflected in the shares of ethanol producers, chopping many of them in half over the last year. Now that these troubles have been accounted for in decreased share prices, it is important to look at these companies going forward. VeraSun trades at around 21-times forward earnings estimates, while Aventine is at 45-times, and Pacific is expected to continue to take losses.

None of them compare to U.S. BioEnergy, which is trading at 15-times forward earnings and 11.5-times trailing earnings. I think this is likely due to the lack of press the company gets compared to its peers. With U.S. BioEnergy's earnings growing impressively, and VeraSun's dropping quarter-over-quarter, it seems to me that there is a lot of upside in U.S. BioEnergy shares. (To learn more on this, check out the P/E Ratio Tutorial.)

The Bottom Line
U.S. BioEnergy is one of the few in the ethanol industry that in a position to succeed. The company's efforts have shown through earnings growth and margin improvement, while the other ethanol pure-players are struggling. This stock has a great combination of better growth potential, strong industry footprint and attractive valuation. Overall, I have to conclude with a bullish opinion on U.S. BioEnergy shares.

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By Wayne Pinsent

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