Cheap Ethanol, Archer's Gain?
Andrew Farrell, 07.02.07, 11:15 AM ET
With ethanol output booming, concerns of a glut tackled shares of producers in recent months. But one was trading higher Monday on hopes that it could benefit from the tough conditions.
Shares of Archer Daniels Midland were up 86 cents, or 2.6%, to $33.95, after Bank of America analyst Edgar Roesch upgraded the company to "buy" from "neutral." Roesch explained that cheaper ethanol could mean discount acquisitions for Archer.
Archer Daniels Midland shares have lost 9.8% over the past three months, partly on concerns that an ethanol surplus is coming. With high oil prices and rich U.S. government subsidies, producers have rushed to ramp up production of the fuel. (See: "Ethanol Output Hits Record Levels") Roesch estimates that the increased production will push down Archer's margins on ethanol from 70 cents per gallon to 35 cents.
However, Archer is better poised to weather the tough conditions than some of its competitors. For one, it's more diversified that most other producers. Unlike such pure-play ethanol companies as VeraSun Energy and BioFuel EnergyArcher processes corn not just for ethanol but also for syrup, starch, and high-fructose sweeteners; it also operates an oilseed and agricultural services divisions. Archer does not break out how much of its sales come just from ethanol.
Archer also produces ethanol more cheaply. "As a low-cost producer, ADM will weather storms better than competitors and could buy assets inexpensively if ethanol fundamentals turn negative as we expect," Roesch said.
Archer looks ready to benefit from a huge corn crop. Last week, the Agriculture Department reported that farmers planed 19% more corn in 2007 than the previous year. (See: "Corn Is King In the U.S.")
"This could significantly lower Archer Daniels Midland’s input costs for ethanol versus its competitors and also provide some benefit on sweeteners," said Roesch, who maintained a $40.00 price target on the company.
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