Pacific Ethanol reports fourth quarter, gross margins improving
Ian Gilson, CFA
Pacific Ethanol (PEIX) reported its fourth quarter and full year earnings on February 27, 2012. Due to lower volumes of gasoline sold in California, and an excess inventory of ethanol statewide, the price of ethanol declined significantly in December 2011. However, the cost of corn, the major raw material, did not decline as farmers held back on selling some of their inventory. Ethanol producers did not reduce production rates and the combined effect of excess production and declining demand had a very negative impact on ethanol prices.
Gross margins improved slightly from third quarter levels as the company is implementing process changes to improve profitability. This should have a positive impact in this, and future, years.
Refineries are currently blending ethanol into gasoline at below the mandated level and are using their RIMs to maintain profitability. In 2013 the E15 (gasoline with 15% ethanol) blend should be introduced into the market and this should have a positive impact on ethanol demand in the second half of 2012.
The excess ethanol inventory continues into the March quarter of 2012. We expect a decline in ethanol sales by Pacific Ethanol in the first quarter and then increasing sales for the rest of the year. If the excess ethanol inventory is consumed as E15 is introduced and gasoline consumption increases on a seasonal basis we would expect the company to restart the (currently idled) Madera plant.
Pacific Ethanol will probably continue to increase its ownership New PE Holdco LLC as a low cost way of adding to its owned ethanol capacity.
We have adjusted our estimates to reflect lower than anticipated ethanol prices.
We continue to rate the stock as Outperform with a price target of $3 a share
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