VeraSun a Buy Up to $9.75

VeraSun Energy Corp. (VSE) registered nearly six-fold growth in revenue in the second quarter of fiscal 2008 and surpassed the $1 billion mark. The company's net income rose to $23.9 million compared to net income of $15.1 million in the year-ago quarter after its merger with fellow biofuel company U.S. BioEnergy. Earnings were boosted by both higher ethanol production volume and average per-gallon price, year-on-year.

VeraSun Energy and U.S. BioEnergy's merger, upon completion, formed the largest bio-fuel company in the world, slightly surpassing Archer-Daniels-Midland Company (ADM). The combined entity, with 11 operating facilities, has an ethanol production capacity of 1.1 billion gallons representing 13% of total ethanol production capacity in the US. VeraSun has four additional facilities under construction and expects to add 550 million gallons more taking annual capacity to 1.64 billion gallons by year-end 2008.

Looking ahead, increasing ethanol prices, recent bullishness in 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 growth momentum over the near-term.

Nevertheless, risks include the cyclicality of the ethanol industry, a tight credit market, a rising debt level and escalating prices of corn and natural gas. Accordingly, we maintain a Buy recommendation on VSE with a six-month target price of $9.75, representing 38.7% upside potential.

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