May 21, 2008

 

Soaring share price of Pacific ethanol creating doubts in the market

 

 

A soaring share price for Pacific Ethanol Inc (PEIX) has left analysts speculating at the cause when recent news on the company had little to offer in fact.  

 

The company reported better than expected earnings recently. Earnings of 6 cents per share beat analyst expectations of a 9-cents-per-share loss.

 

Additionally, a report from a Web site, thetechtrader.com, rated the company as its technical-trading pick of the day, which may have also bolstered investor interest.

 

Analysts say the earnings surprise was minimal, and did not fully account for the heavy trading of Pacific seen this week. The company's stocks rose 60 percent on Monday (May 19, 2008) and an additional 11 percent Tuesday (May 20, 2008), surging up as much as 25 percent during the course of the day.

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This came amid unusually heavy trading for the company: trading volumes were above 18.1 million, far outstripping those of Pacific's larger peers, VeraSun Energy Corp. (VSE) and Aventine Renewable Energy, Inc. (AVR), which each saw volumes closer to 2.3 million.

 

About 15 percent of the company's 41.8 million outstanding shares changed hands Tuesday (May 20, 2008).

 

The spike in interest in the US$231 million Sacramento, Calif.-based company despite concerns about its financial health may be due to technical trading, according to Oster and other analysts.

 

Some shareholders may have been buying back previously sold positions to take advantage of the lower price, according to analyst Eitan Bernstein of FBR Capital Markets. Unlike VeraSun and Aventine, for whom institutional investors hold at least 80 percent of all shares, Pacific's shares are held primarily by individual investors and institutional investors hold only 40 percent of the company.

 

These individual investors often trade more aggressively than financial institutions, which may account, in part, for the share's heavier movements.

 

Despite some recommendations from pundits, analysts who focus on the company's fundamentals continued to give it a poor rating.

 

Rising corn prices, and growing transportation costs have put the producer of corn-based ethanol into a precarious position, says JinMing Liu of New York-based research firm Ardour Capital Investments. Because Pacific depends upon transporting corn from the Midwest to its California plants, a 12-cent-per-bushel increase in corn transportation costs quarter-on-quarter has hit its bottom line, he said.

 

Other concerns for the company include violations of debt covenants.

 

The company violated at least debt five covenants, and had to pay US$521,000 to obtain waivers from these commitments, according to filings with the Securities and Exchange Commission. The company's violations included its cash management, failure to maintain adequate amounts in a debt service reserve account, and an excess of Eurodollar loans. As of March 31, the company was in compliance with the amended covenants.

 

Oster suggested that the waivers to the covenants may not be attainable again, which would force the company to seek a rapid cash infusion after banks next review its debt covenants.