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(MONEYMADE) Ethanol Stock IPO Analysis: VeraSun Energy (VSE) Related Stocks: VSE Date: TBA ClearFish Research submits: Background: For background on the ethanol market see here and here. Story: As pointed out in a WSJ story Thursday, VeraSun Energy (VSE) is the second largest domestic corn-based ethanol producer (led by ADM, and followed by Aventine Renewable Energy), with 230M gal/year of current ethanol production capacity at 2 dry-grind plants (in Aurora, SD, and Fort Dodge, IA), and a third 110M gal/year plant under construction and expected to start up in Summer 2007. Just like everyone else, the also sell Distillers Grains (left over corn meal after the fermentation process) as an agricultural feed. Company: The Aurora plant uses 43M bushels of corn to produce 120M gal ethanol and 390K tons of Distillers Grain, while the Fort Dodge facility uses 39M bushels of corn to produce 110M gal ethanol and 350K tons Distillers Grain. VeraSun gives the actual numbers (not capacities) for 2005 (prospectus, pg 7), which show for 2005 they sold 126M gal ethanol at an average price of $1.59/gal. That would account for $200M of their $235M revenue, the remainder coming presumably from sales of Distillers Grain. That means they offset their corn costs by $0.42/bushel capacity ($235M-$200M/43M+39M) through selling of Distillers Grains. It’s cute to know exactly how much they produced, but all we really care about is revenue and income. Of note though is that they report ethanol sold (not produced) as 126,346,295 gallons for 2005. I just like the precision of their accounting - it’s a perfectly countable term the way they defined it (if it was a production number, or transported number, etc., I would laugh, but gallons sold is an easy line item), and it’s nice to see they have their processes well managed, and their language precise. But about those numbers, we could just say that they generate $1.03 revenue/gal of ethanol capacity, and their $23.7M operating income gives them $0.18 of operating income/gal of ethanol capacity. By those measures, they are operating far less efficiently than Aventine ($1.38 and $0.47, respectively). That is the cleanest measure we can come up with that accounts for their ability to run their plant at or near capacity (the dollar figure goes up or down if run above or below capacity), the price of corn and every other production cost, and is comparable across companies. In the spirit of comparability, we also have their OP margin of 10% ($23.6M/$235M). For their profitable 2004 they had a gross margin of 21% ($39.7M/$186M), which dropped to 15% ($35.5M/$235M) in break-even 2005. That’s not the sort of trajectory we look for. Breakeven ($0.01/share earnings) on selling ethanol in 2005? We’re surprised, but Blah. They intend to use the IPO proceeds for the construction of 2 additional 110M gal/year ethanol plants, one in Iowa, and one in Minnesota. Stock: Not listed yet, but given their unspectacular operating history, when all the stars were aligned for them, we’re skeptical of how they would fare if the price of ethanol took a nose dive. Unless they are available for a truly compelling price, we’re likely to pass. energystockblog.com | ||||||||||||||
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