The United States has been an insatiable consumer of oil, particularly over the last 50 years, as its economy has steadily expanded. And in recent years 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 the coming energy crisis, read Peak Oil: Problems And Possibilities.)
Is Corn The Next Oil?
Very simply, 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 somewhat 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 would benefit from its demand.
Companies Involved in Corn-Based Fuel
| Company |
Market Cap |
The Andersons
(Nasdaq:ANDE) |
$717.3M |
Cosan Limited
(NYSE:CZZ) |
$2.6M |
|
Green Plains
Renewable Energy
(Nasdaq:GPRE)
|
$55M |
MPG Ingredients
(Nasdaq:MGPI) |
$103.8M |
Pacific Ethanol
(Nasdaq:PEIX) |
$82.9M |
Meet The Andersons
The Ohio based company is actually composed of several business groups. Its segments include: grain and ethanol, rail, plant nutrient, retail, and turf & specialty. In simple terms that means it does everything from: selling and repairing rail cars, to formulating plant nutrient products, to producing turf fertilizer. It also sports some retail stores that sell a variety of home related goods, and operates ethanol plants.
It operates three plants that are collectively capable of producing 275 million gallons of ethanol. The Andersons also piqued my interest late last month when it outlined its forecast for 2008 earnings. It is now calling for 2008 earnings to be$4.40-4.80 per diluted share. That's pretty attractive for a stock that currently trades under $40 per share. This range is also miles ahead of the $3.65-$4.00 per share guidance it issued back in May in conjunction with its first quarter numbers. Note: The performance of its plant nutrient businesses was credited.
If the demand for ethanol perks up, The Andersons could gain attention from investors and fare well as it has its handless both the operating and marketing aspects of the business. Analysts expect The Andersons to grow at a 10% pace per year for the next five years, according to data provided by Yahoo Finance. For this year the estimate is $4.61 per share and $4.52 per share next year. Incidentally, the shares sport a small dividend. The current yield is 0.9%.
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.
