Pacific Ethanol: Market Growth and Increase in Production to the Rescue

by: Eddy Lahens August 28, 2008 | about stocks: PEIX    

Eddy Lahens

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Stating that the ethanol business is a challenge is an understatement! But could it be that a cross-over operating point is at hand at Pacific Ethanol (PEIX)?

3Q Operating profile:

  1. Construction phase of 4 plants will be DONE. Will some cost for supervising construction come out?
  2. In-house production of ethanol will SURPASS resales volume. Future sales will push in-house volume while using resales source as supply insurance.
  3. Year to year market volume still expanding

If PEIX can slowly substitute its own ethanol for ethanol resold in past quarters, to the SAME CUSTOMERS, PEIX can expand its margin; thus spreading costs (production and marketing ) over its revenues. In other words, if its margin is 1 cent on resold volume, it can make 5-10 cents on in-house production.

So, even if the spread between corn and ethanol stabilizes, better margins from selling PEIX home-made rather than resales volume of ethanol can create a wider operating margin than during the plant construction phase.

Kudos to PEIX for developing a marketing business AHEAD of the construction completion of its plants.

Disclosure: Long.

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This article has 1 comment:

  •  
    Oct 02 04:25 PM
    This comment is one month later after the original post.

    On Oct 2nd at an Oppenheimer Investment event, PEIX CEO stated that although they have increased prodcution, sales volume will be approx 50/50% in-house vs resales production.
    So, just to correct point # 2 above, resales group is growing as fast as the new plant coming online in 2Q and 3Q... Good news that local markets are absorbing both production and resales gallons coming across from other companies.
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