Ethanol sector slapped on bad VeraSun earnings

Partly blaming high corn prices, prominent American ethanol maker VeraSun Energy (NYSE: VSE) dramatically missed analyst estimates in earnings announced this morning.

Its stock has been sent tumbling, down as low as 14.5% this morning, and shock waves are being felt throughout the corn ethanol sector.

The company posted a net loss of $312,000 for the quarter, "primarily due to increased corn costs, startup expenses relating to the Charles City facility and expenses associated with implementation of Sarbanes-Oxley compliance," it said.

VeraSun, which closed up 16 cents yesterday at $19.61, had been expected to report a profit of 11 cents per share.

During the same period in 2006, VeraSun posted profits of $2.7 million, or 4 cents per share, on $111 million in revenue.

VeraSun paid $4.05 per bushel of corn in the recent quarter, on average, compared with $1.87 a bushel in last year's first quarter, company officials said.

"Corn costs were up for the quarter due in part to a mark-to-market adjustment for corn hedged for future periods," said Donald L. Endres, Chairman and Chief Executive Officer of VeraSun. "Excluding the mark-to-market adjustment, our corn costs were at the lower end of our guidance levels."

And although VeraSun noted it is being paid more for its ethanol given rising gas prices, today's numbers raise questions about whether ethanol can now still be made cost-effectively.

Starting back last November, industry observers began forecasting profitability problems in the corn ethanol industry given rising corn prices. See the Cleantech Group's Ethanol concerns from the American corn heartland, Ethanol shakeout coming? and Corn ethanol crisis looming, says watchdog.

Some analysts are calling today a tipping point for the industry. W.R. Hambrect & Co.'s John Roy wrote a note to clients this morning that the "bloom was off ethanol," and downgraded VeraSun to "sell," with a price target of $11.

"The commodity pricing environment continues to looks difficult ... we believe VeraSun's current valuation is high given the likely movements of corn, natural gas and ethanol in 2007 and 2008."

"The economics are the problem and other choices, like NGVs and PHEVs look to make E85 a non-starter," he said to the Cleantech Group.

That said, corn prices weren't the only factor in VeraSun missing its numbers. During the first quarter, the company incurred expenses related to built up its ethanol sales, logistics and customer service capabilities, and marketing of its own ethanol on April 1st.

It also started up its plant in Charles City ahead of schedule, the costs of which partially contributed to the marginal loss this period.

Still, the news was enough to shake ethanol investors, and send shares of companies like Archer Daniels Midland (ADM) (NYSE: ADM) and Pacific Ethanol (NASDAQ: PEIX) both down about 2 percent, and Great Plains Renewable Energy (NASDAQ: GPRE) down about 3 percent.

Shares of leading American ethanol producer ADM took a drubbing last week upon announcing earnings that also missed analyst estimates. The company's substantial corn processing operations were bolstered by lower operating costs and increased ethanol and sweetener pricing, but partially offset by higher corn costs. The company is trading at 35.49 a share today, down from its mid-April high of 39.52.

VeraSun also announced that it plans on selling $450 million in notes to finance a portion of the costs of construction and startup of a 110 million gallon per year ethanol production facility near Reynolds, Indiana, to purchase and install corn oil extraction equipment at its three operating plants and for other general corporate purposes.

VeraSun Energy is one of the largest producers of ethanol in the U.S. based on production capacity, according to the U.S. Renewable Fuels Association. Producing 670 million gallons per year, it bills itself as the number two maker of ethanol in the U.S., behind ADM.

Poet, formerly Broin Companies, now claims the distinction of second largest ethanol producer in the U.S., as "one of only two ethanol companies with an annual production capacity over one billion gallons," according to a recent press release.

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