Merger Keeps VeraSun Bright

VeraSun Energy (VSE) is on the fast track of growth with its recent merger with fellow biofuel company U.S. BioEnergy. Earnings rose in the reported 1st quarter due to higher ethanol volumes and prices, partially offset by surging corn prices.

Post-merger, the company is expected to become the largest bio-fuel company in the world. However, the cyclicality of the ethanol industry and rising prices of corn and natural gas, remain a concern. Nevertheless, recent bullishness on the energy bill for ethanol production, rising crude oil prices, ongoing capacity expansion plans and value unlocking through synergies from the recent merger with USBE should maintain the momentum of growth over the near-term.

Accordingly, we maintain VSE at a Buy recommendation with a six-month target price of $7.50, representing 27.1% upside potential. As of the date of this report, VSE trades at only 10.9x our 2008 earnings per share estimate, or at significant discounts to the alternative energy average and median multiples and most of its comparable peers. However, given the recent merger with USBE and value unlocking through synergies, coupled with ongoing expansion plans to become the market leader in biofuels, we view VSE as trading at an even greater discount.

Read the full analyst report on VSE.