High Flying Stock: Pacific Ethanol Inc.

By: jarberman
Pacific Ethanol, Inc. is a publicly traded company (NASDAQ: PEIX) that is engaged in the development, production and marketing of renewable fuels in the United States. The company has five ethanol plans under construction on the West Coast with expected capacity of 200 million gallons. In addition, the company's wholly owned subsidiary is one of the largest marketers of ethanol and generated in excess of $82 million in sales last year.

To many investors, the whole concept of ethanol is new. Ethanol is a fuel additive that is commonly made from corn, but can also be made from wheat, barley, potatoes and other crops. In addition, new technologies are enabling the production of ethanol from corn stalks, grain straw, paper pulp and even municipal solid waste. The starch or sugar portion of the corn is fermented and then distilled into alcohol. Sounds like a new concept, but early versions of the first automobiles ever produced ran on gasoline or ethanol!

Since January, the stock of Pacific Ethanol, Inc. (NASDAQ: PEIX) has increased almost 400% and currently trades at a market valuation in excess of $1 billion. Why all the investor excitement?

Pacific Ethanol may be in the right place and at the right time for the following reasons:

a)Ethanol is a commercially viable fuel additive that is rapidly taking the place of a fuel additive which has been banned in many states.

b)Ethanol additives results in less pollution than existing gasoline.

c)Demand for ethanol has far exceeded the industries production capacity.

d)A large number of vehicles are already capable of using gasoline mixed with an ethanol additive, usually under a 10% ethanol / 90% gasoline mixture. In addition, many manufacturers have committed sharp increases in the production of vehicles that can take much higher percentages of ethanol.

e)The production of ethanol has been highly profitable.

f)Federal and State governments are rapidly moving towards the use of alternative fuels to reduce dependence on foreign oil.

g)The company has one of the strongest management teams and a very experienced board of directors.

h)The company has attracted significant funding, including approximately $84 million in preferred stock from Cascade Investment, LLC, which is owned by Bill Gates.

Historically, companies with strong management, access to necessary investment capital and with critical mass in a rapidly growing industry - are companies to watch very closely. We believe that the Pacific Ethanol is well positioned to capitalize from the production and marketing of ethanol and should be watched closely.
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