The United States has been an insatiable consumer of oil, particularly over the last 50 years, as its economy has steadily expanded. Now, emerging economies with large populations such as India and China have been making vast purchases of black gold.
The problem with all of this wonderful economic growth is that oil is a finite resource. But the good news is that a solution could be found in alternative fuels, and more specifically, a little something called "ethanol". (To learn about energy woes, read Peak Oil: Problems And Possibilities.)
Is Corn The Next Oil?
Ethanol is considered to be a cleaner burning fuel that can be made from an entirely renewable source - corn. Perhaps not surprisingly, ethanol has received a great deal of attention in recent years due to swelling oil prices. However, it has not enjoyed mainstream popularity for three reasons: It's time-consuming and costly to produce; there are ethical issues surrounding the conversion of food producing land into fuel producing, and many argue it is simply easier to import oil. (To learn about these issues in greater detail, read The Biofuels Debate Heats Up.)
The fact remains, however, that the growing worldwide demand for and limited supply of oil seems to necessitate the eventual development of an alternative fuel such as ethanol - if for no other reason than to reduce America's dependence on foreign oil. Investors who are so inclined can get in on the action by taking positions in companies that develop ethanol and/or that could benefit from its demand.
Companies Involved in Corn-Based Fuel
| Company |
Market Cap |
|
The Andersons
(Nasdaq:ANDE)
|
$814.7M
|
|
Archer Daniels Midland
(NYSE:ADM)
|
$16.9B
|
|
Aventine Renewable Energy
(NYSE:AVR)
|
259M
|
|
Pacific Ethanol
(Nasdaq:PEIX)
|
$115.8M
|
|
Verasun
(NYSE:VSE)
|
$1B
|
|
Data as of market close August 20, 2008
|
Archer Daniels Midland
Food ingredient and ethanol producer Archer Daniels Midland has seen better days. Its stock is currently trading near its 52-week low as can plainly be seen in this chart. In addition, it's coming off a less than stellar fourth quarter.
In the fourth-quarter, the Illinois-based company earned $372 million which is earnings per share of 58 cents. And although that might sound pretty hefty, its well shy of the $955 million, or $1.47 per share, it reported in the same period last year. It was also south of the 68 cents per share that the Street forecast.
Tax loss selling could place some pressure on the stock going forward, and there are no guarantees when it comes to future earnings. There is one thing for investors to remember, however. Archer Daniels Midland is the company behind the ingredients that go into so many of the products that we consume. It is the No.2 ethanol producer in the United States. So, despite the doom and gloom mentioned above, the company has a bright future.
At present, ADM is expected to earn $2.54 a share in the current fiscal year and $2.73 a share next year. That’s not too shabby in my book given that the share price is currently under $27. Again, there are no guarantees when it comes to demand for ethanol or ADM's earnings; however, I do feel that the stock is oversold. (For more on street and company expectations, see Earnings Forecasts: A Primer.)
Bottom Line
Ethanol is still in its infancy stage, and its success is not guaranteed. The rising cost of oil has fueled demand for alternatives. I think the above-mentioned companies have a great opportunity to take advantage of this long-term move toward increased use of ethanol as a source of fuel.
For more on how oil supply can affect your investments, check out Peak Oil: What To Do When The Wells Run Dry.
