Como se combate o populismo? "Com eleições", responde Fukuyama

[Dracull]

Robert Walberg

With oil prices above $70 a barrel and the U.S. determined to reduce its dependency on foreign oil, it's no surprise that the once-boring ethanol industry is now seriously sexy to investors.

Here's why: Even with the recent market correction, these stocks are up big this year. Archer Daniels Midland (ADM, news, msgs) and Pacific Ethanol (PEIX, news, msgs) boast year-to-date gains of 68% and 137%, respectively.

If you missed out on investing in either of these winners, don't fret. There are three new ethanol plays scheduled to go public over the next several weeks: VeraSun Energy, Hawkeye Holdings and Aventine Renewable Energy Holdings.

VeraSun is first. Its initial public offering is set for the week of June 12, with the company offering 17.3 million shares priced in the $18-to-$20 range. This is likely to be a hot issue, so by the time the broader public gets a shot, the price will likely be much higher.
VeraSun: What will growth cost?
That's not to say those pricier shares won't be worth a look for long-term investors. VeraSun is the second-largest producer of ethanol in the country -- behind only Archer Daniels – and is a profitable, fast-growing enterprise.

For the year ended March 31, the company generated net income of $11 million on a little more than $300 million in revenue. Using proceeds from the IPO, VeraSun plans to more than double its ethanol production from its current level of 230 million gallons a year -- about 5% of the total U.S. production -- to 560 million gallons by the end of 2008's first quarter.

There are a few worries, though. First, going from two plants at present to five plants by 2008 will be expensive, so investors can expect additional stock offerings that may depress the stock price. And as with many IPOs, a big question is whether management is trying to build a lasting business or to simply ramp up production, deliver rapid top-line growth and then exit rich.

Then there's this: Aventine Renewable Energy buys virtually all of the Ethanol VeraSun produces. Recognizing the potential conflict of interest that creates, especially as Aventine starts to increase its own production of ethanol, VeraSun has informed Aventine that the distribution deal will end in March 2007.

Video: Walberg on why ethanol is seriously sexy to investors
Can VeraSun find other distributors for its product? How much will that cost? While these concerns aren't likely to weigh on the IPO, or the stock's short-term performance, they do represent long-term hurdles.
Aventine: Replacing a big supplier
Like Pacific Ethanol, Aventine derives most of its revenues from marketing and distributing ethanol. Pacific's stock has performed extremely well, so there's a good chance Aventine's offering will be a hot one.

The company recently announced plans to offer 7.75 million shares at a range of $37 to $41 per share. But this should raise eyebrows: Insiders are selling 1.4 million shares on the offering, or about 18% of the total shares.

Aventine currently produces less than 150 million gallons of ethanol a year on its own. Revenues from ethanol production last year totaled a modest $120 million, or about 20% of the company's total sales.

As noted above, the company will be losing one of its key partners in less than a year, so its marketing revenues are at risk, as well. Could management replace the lost VeraSun business? Sure, but considering that VeraSun is the No. 2 producer of ethanol, it's unlikely they will be able to replace that supply by partnering with smaller producers.

Aventine does plan to bolster its internal ethanol production with part of its IPO proceeds. But investors again need to ask how successful the current management team will be with managing growth and with adjusting the mix of its business.
Does pork experience matter?
Hawkeye Holdings hasn't yet indicated when it will go public and under what terms. But we do know that the company had $99 million in revenue and generated $14 million in net income in the year ended March 31.

Hawkeye currently has one plant in operation in Iowa Falls with a capacity to produces 80 million gallons a year, well below VeraSun's production. Hawkeye plans to bring a plant in Fairbank, Iowa online soon that is expected to produce 100 million gallons a year.

Almost the entire Hawkeye management team used to work for a company called Heartland Pork. I have no idea how similar the pork processing business is to ethanol production, but it sure would have been nice to see a management group with broader experience. Of all the upcoming deals, this is the most suspect.

It's not just the company's themselves that make these IPOs risky. Other variables include corn prices, the boom in production capacity and growing competition. Nevertheless, as long as oil prices and demand for alternative energy sources remain high, ethanol-related stocks are likely to outperform the market. My pick of this litter? VeraSun.

At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.

Robert Walberg is a financial writer based in Chicago, Ill. He was formerly chief equity analyst at Briefing.com. He is a regular guest on CNN's Moneyline and CNBC's Squawk Box, and is a weekly guest on CNNfn's "Digital Jam" program. Mr. Walberg ran for Congress in Illinois in 1994.