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Beware the Allure of Ethanol Investing

I am a fan of ethanol. The addition of corn ethanol to our US fuel supply chain has had a significant impact in keeping gasoline prices way lower than they otherwise would have been, and has paid for the subsidies many times over. But that has not translated to gains for ethanol stocks, which are down on the order of 50% over the last year according to the Camino Energy index, and it won’t change anytime soon.

As the bellwether US ethanol pureplays are finally down to earth, and my predictions have come to pass. Two years ago ahead of Verasun’s (NYSE:VSE) IPO, I blogged an analysis saying I thought Verasun should trade in the $3 to $8 range, depending on the margin, PE, and growth assumptions. The bankers and the market thought I was nuts, treating VSE and Aventine (NYSE:AVR) which listed near the same time as technology style growth stocks. The company listed at several times my target range, and then traded way up from there. But as I had predicted, the margin pressures from a range of commodity price movements and the relatively low barriers to entry for capacity additions came to bear. But the fall is probably not over.

I stated then and reiterate now that ethanol companies are basically small refiners with potentially worse economics. And refiners traditionally trade at single digit PEs, and single digit PE. Worse, refiners don’t always do well when commodity prices rise or their markets grow fast, as the spreads they make their margin on are often affected as much by relative capacity contraints as the raw commodity prices themselves. In fact, fast moving commodity prices in either direction in either refined products or feedstocks can sometimes bode ill for refining profits, depending on what’s happening in capacity.

VSE now trades under $5. Right in the middle of range I predicted it should. And the PEs for VSE and AVR are finally down in the range close to the independent refiners group I follow, Valero (VLO), Sunoco (SUN), and Tesoro (TSO). BUT. And there is a but. The TEV/EBITDA multiples for VSE and AVR, which are way down, are still 2-3x those of the refiners, and the PEG ratios are still richer as well. This likely means more room to fall, or at least languish.

The next wave of venture backed ethanol companies, mostly cellulosic, are beginning to break ground on pilot plants, and given the penchant for certain ethanol crazed venture investors to IPO deals when windows open, it is likely we will see some of these soon. And it is likely that they will be sold to the market the same way, as high growth stocks based on great technology and macro conditions justifying stratospheric PEs on unsustainable margins. Then they’ll hit their first commodity cycle, the margins will compress, the bloom will come off the rose, the multiples will come down, and the investors who bought and held post IPO will get crushed.

We’ve seen it before and we’ll see it again. Try not to get caught this time.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding CEO of Carbonflow, founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET’s Greentech blog.

Solar and Renewable Electricity Gain (Week Ending 5/9)

Author: Mark Henwood

Broad market indices (Emerging Markets, EAFA, S&P500) all fell this week. Camino’s PurePlay™ indices were mixed, commodities (ticker DJP) rose strongly.

The PurePlay™ Solar index, comprised of 34 companies, reversed last week’s 2.0% loss with a 0.9% gain. The index members were mixed with 13 stocks increasing and 21 stocks declining. In contrast to last week, two stocks (ENER and CSIQ) increased by over 20%. Energy Conversion Devices’ eye popping 45.2% gain for the week was largely responsible for lifting the index. The company stock rose sharply in very heavy trading after its 7 AM press release on the 8th, and then more after their earnings call concluded later in the morning. The company reported great results for its Q3 with solar product sales up 193% from the previous year. In contrast to prior periods the company showed a profit. More on ENER below.

The Renewable Electricity index increased 0.7% with 11 stocks climbing and 12 retreating. No stock increased or declined by over 20% and nothing caught our attention to report here other then to note that the index’s relatively low volatility continues.

Biofuels followed last week’s loss with an additional 3.4% loss. There were 5 advancing stocks to 10 stocks falling. Biofuels are now down 35.2% for the year, the worst showing of our four strategies.

Aventine (AVR) reversed last week’s gain with a 23.0% decline contributing significantly to the index’s decline. I previously noted Aventine’s large USD 26 million mark-down for its student loan ARS position and noted the company is engaged in other complex financial transactions to hedge operational risk. The company’s value decreased this week by USD 52 million, not because of operational risks, but due to an analyst’s concern about liquidity on the 5th and Moody’s concerns and negative outlook on the 8th. Is there more financial risk to come?

Fuel Cells posted another loss of 1.1% this week with 3 stocks advancing and 4 stocks declining. No stock increased or declined by over 20%.

Energy Conversion: After its big price move, annualizing the company’s Q3 earnings results in a current period PE ratio of 68.

The question is can the company continue the growth necessary to support this price? To grow at the PE ratio, the company will need to expand its Q3 2008 production of 21.6 MW to a Q3 2010 production 61 MW. With its announced plans to increase annual production capacity to 300MW by the end of FY2010 it looks like it may be possible to keep pace. But there isn’t much room for error. Any problems that impact this rapid growth with likely be rewarded with sharp price movements. In our view the stock may be fully priced after this week’s huge gains.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks.

Only Renewables Gain (Week Ending 4/25) + Solar ETFs

Author: Mark Henwood

Broad market indices were mixed this week and so were Camino’s PurePlay™ indices.

The Solar index followed last week’s 7.0% gain with a small 0.2% decline. The index members were also mixed with 15 stocks increasing and 19 stocks declining. Most notable in the group was Centrosolar (C3O.DE) which gained 26.2% for the week. The stock jumped on the 23rd after the company announced provisional results that were above expectations. Sales for the quarter were up 86% over the previous year and EBITDA almost tripled. One analyst suggested the stock was undervalued.


Camino’s Renewable Electricity index managed a small 0.1% increase with 8 stocks climbing and 15 retreating.


Biofuels reversed last week’s 1.5% gain with a 1.9% loss. There were 7 advancing stocks to 8 stocks falling. Several of the ethanol stocks (AVR, PEIX, VSE) seemed to benefit from coverage by Oppenheimer whose analyst believes that overcapacity in the sector will resolve itself in the next 12 to 18 months.

Fuel Cells slumped 5.1% on 1 stock advancing and 6 stocks declining. FuelCell Energy (FCEL) reported a sale to Posco which was well received by the market resulting in a 11% price increase for the week. The sale involved delivering 25.6 MW at a contact value of USD 70 million, or over USD 2,700 / kW. Analysts believe this number is below cost but will help the company reduce its cost. After years of losses FuelCell needs to get it right and get its costs down so it can compete in a very competitive natural gas fired electric generation market.

Solar ETFs It came as no surprise that solar ETFs have been launched by Claymore (TAN) and VanEck (KWT). These two providers worked hard to differentiate their products by using slightly different company selections and weighting schemes. Unfortunately they didn’t decide to compete on cost coming out at an identical 65 basis points.

The result is indices that have a 74% overlap in their 27 constituents. Between the two indices the only company not included in Camino’s Solar index (34 constituents) is MEMC Electronics (WFR). By our computation in 2007 at most MEMC has a 25% exposure to solar so we’re not sure why Claymore included them. We don’t think they currently belong in our PurePlay™ index.

Going forward we expect these ETFs will have comparable performance and very high volatility. We routinely calculate Sharp ratios for our indices in an effort to assess the risk/reward profile of the sector. Over the last 365 days our solar index’s Sharpe ratio was 0.8 and over the last two years the ratio was 0.48, both periods measured against the 13wk T-Bill. Traditional fund managers would probably not find these values attractive particularly considering their high beta. That said, we think there are plenty of opportunities in the sustainable energy sector.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks. Mark has no positions in solar.

Only Renewable Electricity Stocks Advance (Week Ending 4/11)

Author: Mark Henwood

Sustainable energy stocks followed the broader markets down this week with only Renewable Electricity able to show a gain.

The Solar index followed last week’s 14.5% advance with a 4.7% decline. The retreat was broad-based with only 4 stocks increasing and 30 stocks declining. Aloe Solar SG (AS1.DE) led the declines falling 13.1% for the week despite positive news on April 3 that it’s production expansion was on track and it had received orders in 2008 for EUR 150 million. With First Solar (FSLR) also falling 3.5% the decline was not limited to the silicon world as some commentary alluded to. Without extraordinary news to push the sector down the relatively modest change for this highly volatile group seems to be primarily driven by broader market movements.


In the Renewable Electricity sector Camino’s index advanced 0.3% with 14 stocks climbing and 9 retreating. German wind farm developer Planbeck Neue Energien Ag
(PNE3.DE) led all increases with a 13.1% gain. On March 31 the company reported on 2007 results and conducted a press and analyst conference. The company reported a solid pipeline and positive news about its wind blade subsidiary SSP Technology. While the stock price didn’t react for a few days it looks like this week’s price gain is a reaction to the recent news.

Biofuels reversed last week’s small gain with a 7.5% decline culminating in a YTD decline of 32.4%. There were 3 advancing stocks to 12 stocks falling. Aventine (AVR) led the way down lowering 23.1 % for the week. 9.5 % of the decline occurred Friday after a USB analyst lower their target price due to concerns over corn prices and shrinking margins. Aventine is now valued at USD 0.97 per gallon of production capacity. This compares favorably with VeraSun’s (VSE) value of USD 0.67 per gallon of production capacity (after this year’s 5 new plants start-up). If it is possible to make any money producing ethanol, the company valuations have to be getting low enough to be attractive.


Fuel Cells also reversed last weeks gain with the index falling 2.2% on 1 stock advancing and 6 stocks declining. Ceramic Fuel Cells LTD
(CFU.L) kept the index from falling further with its 13.6% gain for the week. We found no public news that would explain Ceramic’s being able to move counter to the market unless these are second reaction to the company’s Feb 28 order announcement. ITM Power (ITM.L), on the other hand, continued to lose ground with a 12.4% decline. I share the market’s skepticism about the impact of the company’s recent electrolyzer development.

Solar continues to move with the broader markets, all of which were down for the week. With its high beta over any period during the last 500 days the index’s performance this week is to be expected. Biofuels continue to be plagued by questions regarding profitability. Clearly, getting bigger, like VeraSun did with it’s acquisition of US Bioenergy, isn’t perceived as materially helping the basic operating cost issue. At some point stock prices for Biofuel companies will get low enough to present a compelling price / cash flow return and investors will start taking positions.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks. Mark has a position in PNE3.DE

The week in sustainable energy stocks….

By Mark Henwood

Neal says “keep going”. So let’s start with the big picture.

Stocks were down – S&P, EAFA, emerging markets. Commodities advanced. The broad based ETN tracking the DJ AIG commodity index (DJP) increased 3.1% for the week. This was the week of oil history. Our sustainable energy indices were mixed with one, our biggest, declining and three advancing.

The Solar index suffered another large decline dropping 5.2% bringing the YTD decline for the sector to –38.9%. Solarfun Power Holdings Co. Ltd (SOLF) -16% and JA Solar Holdings Co (JASO) -13.9% led the decline after an analyst downgrade prompted by declining margins and weaker demand. With 25 stocks declining versus 8 advances, these concerns must be widely held.

In Biofuels our index advanced 1.8% led by an impressive 52.7% increase, in US dollars, for Basil Ecodiesel (ECOD3.SA). Despite Basil Ecodiesel being the largest biodiesel producer in Brazil, none of our usual news sources reported any developments to explain the sharp increase. Aventine (AVR) continued downward off another 7.3% in the wake of its liquidity issues, despite S&P leaving Aventine’s rating unchanged.

In the Renewable Electricity sector our index advanced 1.8% with 12 stocks advancing and 7 declining. Our scan of the news showed a series of normal announcements typical of an industry with some traction. The index results this week, moving counter to broad markets, are not surprising given the index’s 100 day beta of only .3.

Fuel Cells had a strong week with the index increasing 7.8%. The increase was due in large part to the 44.6% gain for Ceramic Fuel Cells Ltd. (CFU.L) Ceramic reported it was constructing a manufacturing plant in Heinsberg, Germany and a substantial order for 50,000 2 kW micro CHP units from NUON. If these units are able operate reliability at a reasonable cost this could be an important breakthrough in a significant market targeted by a number of fuel cell companies.

What did I learn this week? Market developments reinforced the highly “leveraged” nature of solar stock prices. High growth expectations result in high volatility. I also realized I need better information sources for some of the lesser developed markets like Brazil. These are important investment centers and I’ll be looking for improved resources. We also saw investors are carefully looking for the key breakthrough. Ceramic is now center stage.

Mark is the founder of Camino Energy, a information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks.

The week in sustainable energy stocks….

Neal asked me if I would comment on the markets for sustainable energy stocks in the last week. It’s an area I follow closely so he hopes I will occasionally stumble across some nuggets.

Let me start by saying I believe there is potential for good returns in sustainable energy stocks over time. In the short term though, it was a tough week. Sustainable energy stocks in all four of Camino’s sectors declined. In contrast, broader indicators such as the S&P, EAFA, and emerging markets were all positive for the week.

The Solar index, comprised of 33 companies, suffered the largest decline with a 5.3% drop bringing the YTD decline for the sector to -35.5%. Suntech (NYSE:STP) was hardest hit with a 20.3% price decline after it reported earnings and revenue below expectations, driven in part by silicon supply issues. If other producers report similar problems I would expect to see further declines in the sector as prices adjust to lower growth expectations.

In Biofuels Aventine (NYSE:AVR) was off 17.4% after it reported Thursday it had liquidity issues stemming from its $211.5 million invested in auction-rate securities. This issue may delay plant development. I expect analysts are reviewing the balance sheets of other sustainable energy companies to see if they have “cash equivalents” that aren’t exactly equivalent to cash. If you don’t understand what you’re investing in don’t invest in it.

In the Renewable Electricity sector Solar Millenium (FRA:S2M) declined 10.1% . The company announced a rights issue on Feb 19 that may have triggered concerns about dilution. Overall 8 stocks advanced and 11 declined resulting in relatively modest decline of 1.1% in the index.

In Fuel Cells all of our companies reported price declines with Fuel Cell Energy (NASDAQ:FCEL) falling the most at -6.3%. The company presented at the PiperJaffray conference on February 20, 2008 and didn’t highlight any items of concern that I noted.

What did I learn this week? Apparently growth constraints are still a factor in the high growth solar sector. I also relearned that unexpected risks occur when broader markets are having problems. Are there more surprises from the credit markets waiting to be revealed in sustainable energy companies?

Mark is the founder of Camino Energy, a information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks.