Wednesday, April 26, 2006


few months ago, only a few investors knew about Andersons Inc. and its grain-storage and rail-car businesses. Even in its hometown of Maumee, Ohio, the company is better known for stores that feature microbrews, fresh breads and garden supplies.

But the company’s recent entry into the burgeoning ethanol industry has sent its stock soaring. Investors are betting that new energy regulations and high gas prices could lead to an earnings bonanza for companies such as Andersons, ADM and Pacific Ethanol that produce the fuel additive made from fermented corn that allows cars to run more cleanly.

“Right now, making ethanol is almost like having a money machine,” said Spencer Kelly, an ethanol analyst for the Oil Price Information Service in Rockville, Md. “Ethanol looks strong as long as gasoline prices stay strong and corn prices are low.”

Andersons, founded by Harold Anderson in 1947, turned a grain mill into an agribusiness that had $1 billion in sales by 1995 and went public a year later. The company’s move into ethanol production is a natural step given its network of grain elevators and its large rail fleet, which account for most of its profits.

Chairman Richard Anderson and former Chairman Thomas Anderson, two of the founder’s sons, remain among the company’s biggest shareholders. Richard Anderson’s shares were worth $6.5 million two years ago and now are worth $28.5 million.

The surge of interest in ethanol was fueled in July when Congress passed an energy bill requiring the United States to use 7.5 billion gallons of renewable fuels by 2012. Ethanol producers now have the capacity to generate about 4.3 billion gallons.

U.S. refiners are clamoring for more ethanol also because of the phaseout of a natural-gas derivative called methyl tertiary-butyl ether, or MTBE, that allows gasoline to burn more cleanly but also has some health risks. Refiners are stopping use of MTBE because Congress refused to grant them protection from lawsuits.

Private investments in ethanol plants also have soared in the past year. Farmer-owned co-ops built most of the plants during the 1990s, but now only six of the 42 new or expanded ethanol plants under construction nationwide are farmer-owned, the Renewable Fuels Association trade group reports.

Those new plants will be able to produce 2 billion gallons each year.

Individual investors, though, can put money into only a few public companies making ethanol.

Shares of Decatur, Ill.-based Archer Daniels Midland Co., the nation’s biggest ethanol maker, have been trading at 52-week highs in recent weeks. They gained another 26 cents yesterday to close at $36.93 on the New York Stock Exchange. Shares of Pacific Ethanol, which plans to open its first plants this year, nearly doubled in January, the same month that President Bush touted ethanol in his State of the Union speech. Its shares fell 30 cents yesterday to close at $33.00 on the Nasdaq Stock Market.

Pacific Ethanol, based in Fresno, Calif., should be making a profit by next year, said Paul Resnik, an analyst with Dutton Associates, an equity research firm based in El Dorado Hills, Calif.

“Their first plant is still in the future, but the long-term strategy is sound,” he said.

Andersons stock has been rising since 2001, when it traded below $8 a share. But the stock really took off in November, when it was trading at about $40 a share, after posting strong earnings from its rail-car operations and announcing plans for a second ethanol plant. Its shares gained an additional $7.33 yesterday to close at $115.03 on the Nasdaq.

Mr. Resnik also warned that alternative-energy company stocks are likely to be volatile.

“These stocks have moved a long way in a short time,” he said.

The cost of ethanol’s main ingredient, corn, can move up and down based on the weather’s effect on the crop. A sharp increase in corn prices would translate to higher production costs for ethanol makers.

Analysts say a drop in oil prices also could cut into the profits of ethanol makers because ethanol’s cost is tied directly to gas prices at the pump. A rush in demand for fuel-efficient cars or a decision to drop government incentives for ethanol also could spell trouble.

“There’s too many factors out of their control,” said Mark Hughes, an analyst with Lafayette Investments in Ashton, Md.

His firm sold its stake in Andersons at the end last month when shares jumped to $78. He noted that the company has yet to give any profit projections on its two ethanol plants under construction.

“I would take a pause and see how it goes,” Mr. Hughes said. “I think the big move has been made already.”

Andersons is investing about $250 million in two ethanol plants in Michigan and Indiana, which will be supplied with corn it already gets from farmers. The plant in Michigan should open in August.

Andersons said April 6 it planned to build a third ethanol plant next to one of its grain elevators in Dunkirk, Ind.

Heather Jones, an analyst with BB&T Capital Markets, predicted that Andersons will maintain “very nice margins for a sustained period.” She lists it as a “buy” with a $96 price target.

“It looks like they will be profitable into the next year or year and a half,” she said. “The economics of ethanol are incredibly compelling at this time.”

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