Considering it's rallied more than 30% this month, one would think Pacific Ethanol Inc. (NASDAQ:PEIX) not only finally figured out how to turn a profit, but was poised to beat Archer Daniels Midland Company (NYSE:ADM) and/or Green Plains Renewable Energy Inc. (NASDAQ:GPRE) in the ethanol game. Before jumping on the PEIX bandwagon though, it may pay to take a step back and get a little perspective.
Yes, Pacific Ethanol posted some great numbers last quarter, increasing its revenue six-fold on a yoy basis, and more than a 70% increase in volume compared to the year-ago figure. Oh, the company also swung to a profit. It was only $4 million worth of income, which is pretty weak in terms of margin, but pretty solid in comparison to a $9.5 million market cap.
The success - though not exactly sudden - will certainly quiet some of the critics who have long hammered PEIX, citing ethanol just isn't a viable business, particularly without subsidies. On the flipside, one has to wonder what's really driving the growth trend here, and whether or not it can last.
The answer to the questions may lie with or Green Plains Renewable Energy and Archer Daniels Midland; did their ethanol businesses do as well? If so, then it would certainly add a layer of legitimacy to Pacific Ethanol's strength.
As it turns out, they did. GPRE managed to double its revenue, and improve its bottom line by 39%. Though it's also got an agribusiness and is a distributor, more than half of its profit stems from ethanol production. So, ethanol was clearly a factor in the big improvement. In fact, the company specifically noted ethanol's margins were better than initially expected, and it was looking for a strong Q4 for the division.
As for Archer Daniels Midland, the agricultural company won't share last quarter's numbers until next week. And, since ADM isn't a pure ethanol play, we'll still have to dig deep into the numbers to determine what's working well - or not working well - for the company; strength in food production could mask weakness in the ethanol division. However, with Archer Daniels Midland being the biggest ethanol produce in the U.S. (producing 1.7 billion gallons per year) and putting out more than four times the ethanol of the next-biggest ethanol producer, it's clearly 'the' barometer for the industry.
And, business is good... or was before the beginning of the third quarter anyway. In Q2, earnings from its biofuels division grew more than 130% on a yoy basis. Things didn't change that much between then and now.
What does this mean for Pacific Ethanol Inc.? More than anything it suggests the market is finally hitting its stride - all the players are starting to do quite well.
The real litmus test for PEIX, however (and all ethanol companies for that matter) is the price of ethanol itself; is the market willing to pay the prices outfits like ADM, GPRE, and Pacific Ethanol have to charge to maintain profitability... subsidized or not?
The answer is, yeah, so far. The price of ethanol per gallon was last seen at $2.75, roughly the average price seen in Q2. Though we saw a peak of $3.07 on Q3, we also saw a low of $2.52. So, the risk of ethanol pricing itself out of the market was abated before it became a problem; total volume should be about the same in Q3 as we saw in Q2, meaning revenue and margins should be about the same as well.
As long as ethanol prices stay between $2.50 and $3.00, where it's "worth it" for these companies, we can expect more of the same. And, with supply and demand now starting to stabilize as ethanol becomes commercially mainstream [which we really hadn't seen in a meaningful way up until now], odds are we'll see stable, predictable ethanol prices in that range.
Looks like Pacific Ethanol's recovery is the real deal.