Biofuels – Scratching Below the Surface by Hiland Doolittle, Capital Cube
To understand why hedge fund managers and speculators like biofuels, it is necessary to understand what has always driven the fuel that Henry Ford envisioned would power his first Model T’s. Originally, biofuels were seen as the solution to the possibility of a dwindling supply of fossil fuels as well as the rising cost of these fuels. But, biofuels come with their own set of challenges. To understand what is now driving this sector, we need to understand the environmental impact of biofuel development as well as the state of the fossil fuel marketplace.
Make no mistake about it, biofuels are big news and big business. When companies like DuPont and Novozymes are reaching into the sector, you know this is the real deal. The biofuel sector has benefitted from the turmoil in fossil fuel supply. A look at hedge fund favorite Pacific Ethanol, Inc. (NASDAQ:PEIX) and REX American Resources Corporation (NYSE:REX) not only shows significant triple digit gains but improving degrees of sustainability. These companies need to manage their operating margins and risk better but the revenue stream is expanding in pretty amazing fashion.
Biofuels In Theory
In theory, biofuels absorb carbon dioxide and the hope is that this will offset the carbon dioxide emitted from the vehicles the fuel propels. In reality, biofuels require significant amounts of energy to grow and protect. The manufacture and use of pesticides are just examples of the inefficiencies that plagued the sector in the past.
For many years, Brazil’s use of sugarcane has served as the most successful model for the industry. As a result of Brazil’s success, many of the autos in the country are designed to run exclusively on biofuels. Unfortunately in the US and Europe, that is not the case. However, progress on this front continues. With every model designed to use biofuels for energy, the sector gets a boost. In the US, much gas and diesel is blended with ethanol, a popular biofuel.
The true definition of a biofuel is; “a hydrocarbon that is made BY or FROM a living organism that we humans can use to power something. This definition of a biofuel is rather formal. In practical consideration, any hydrocarbon fuel that is produced from organic matter (living or once living material) in a short period of time (days, weeks, or even months) is considered a biofuel.” One of the keys to biofuels is how quickly the energy source can be manufactured compared to fossil fuels which take millions of years to develop.
There are several types of biofuels in production. These include: biodiesel, methane and biobutanol. Environmentalists want consumers to understand that the terms renewables and green are not the same. The driving factors for biofuels are concerns about fossil fuel availability and pricing. The renewable aspect of the sector is an appealing but secondary motivation.
One of the risks of biofuels is the effect these products may have on food supply. In 2011, the US Senate voted 73 -27 to end tax credits that had motivated the industry in the US for several years.
Pacific Ethanol Inc
Hedge fund manager sweetheart Pacific Ethanol Inc (NASDAQ:PEIX) just keeps setting new 52-week highs. At 21.15, shares have gained over 18% in 30 days and a whopping 474.73% over 12 months. By any standard, PEIX growth and revenue is outperforming its peers.
On July 28, 2014, Capital Cube’s news feed indicates the company received a $3 million matching grant from the California Energy Commission to develop a sorghum feedstock program with Chromatin, Inc., the Fresno Center for Irrigation Technology and the Kerney Agricultural Research and Extension Center. CEO Neil Koehler confirmed the award and credited the company’s close relationship with California agricultural sources for progress in the biofuel sector.
But, Pacific Ethanol Inc (NASDAQ:PEIX) needs to improve its growth and revenue management. The company does not offer a dividend. PEIX price to earnings is significantly higher than its peers. While these elements typify growth companies and sectors, it is time for management to step up. Many analysts classify the company as Outperforming.
Price to book is above peers while gross margins are lagging. Not surprisingly, price to sales is well below peers and price to earnings exceeds the peer median. Capital Cube projects that this Chemicals specialist has superior growth expectations.
If you like biofuels, go into PEIX with your eyes open. At some point, the bottom line will come into play.
Free summary analysis of Pacific Ethanol Inc (NASDAQ:PEIX)
REX American Resources Corporation
At 98.10, REX American Resources Corp (NYSE:REX) is up 13.52% in 30 days and a strong 220.98% over 12 months, again a strong performer by all accounts. If you seek a company in the sector that has a bit more diversity, REX American Resources Corp. may be a good option. The holding company produces biofuels and natural gas and other energy products through a number of subsidiaries. The company’s Alternative Energy and Real Estate segments have different approaches to the industry.
On August 18, 2014, shares of REX hit a 52-week high. This marked a string of successes by various subsidiaries. In the last year, shares have climbed from a low of $26.695 to the high of $97.41.
While growth is more tempered than PEIX, REX is growing faster than peers. Over the past five years, the Dayton, Ohio, firm has managed to improve its return on assets from a median average to significantly above median. The company appears efficiently managed and with profitable real estate leases is well positioned to project continued operating performance.
Price to sales and price to book are both well above peer medians. Revenue growth is quieter than PEIX but take note of the company’s EBIT, Return on Equity and net margins. This efficiency is driving shares and is not typical for the industry. Again, the diversity of this company is the attraction.
On August 18, 2014, shares of REX American Resources Corp (NYSE:REX) hit a 52-week high. This marked a string of successes by various subsidiaries. In the last year, shares have climbed from a low of $26.695 to the high of $97.41.
While growth is more tempered than Pacific Ethanol Inc (NASDAQ:PEIX), REX American Resources Corp (NYSE:REX) is growing faster than peers. Over the past five years, the Dayton, Ohio, firm has managed to improve its return on assets from a median average to significantly above median. The company appears efficiently managed and with profitable real estate leases is well positioned to project continued operating performance.