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A Higher Blend of Ethanol in Gasoline Can Fuel These Companies Heading Into Summer

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Following Russia’s invasion of Ukraine, fuel costs have surged. Consumers are increasingly becoming concerned about the elevated costs and wondering when prices will come back down to earth after taking hit after hit at the fuel pump. Now, in an effort to curb the issue, the Biden administration has done something that would typically not be allowed during the summer months.  

On Tuesday, the Biden administration announced a plan to allow a gasoline blend that includes 15% ethanol (known as E15 gasoline) to continue to be sold into the summer months. This higher ethanol blend is typically banned during summer’s warm peak travel months; the heat causes the combination to become more volatile and produce higher smog levels than the typical 10% ethanol blend sold year-round.  

A senior administration official states that the E15 gasoline blend can be up to ten cents cheaper than the typical gasoline that consumers regularly pump. During this time, ethanol producers and agriculture companies that have ethanol operations stand to benefit. Let’s look at three stocks I believe will gain from E15.

Archer Daniels Midland

Archer Daniels Midland (ADM - Free Report) delivers industrial ethanol to refiners through an expansive network of trucks, railcars, barges, and terminals. Made from plant-based ingredients such as corn, the company’s ethanol allows cleaner burning and can be effectively blended with gasoline. ADM’s customers, primarily large energy companies, blend ethanol with unleaded petrol in various concentrations.  

In its latest earnings report, Vantage Corn Processor’s (a subsidiary of ADM) results were substantially higher year-over-year, boosted by historically strong ethanol margins and robust demand. Additionally, ADM saw increased ethanol sales volume attributed to the re-opening of two previously closed dry mills. An increased ethanol production capacity bodes well for ADM moving forward.

The company expects domestic ethanol demand to increase to pre-COVID levels and assumes higher ethanol volumes and EBITDA margins to average $0.15 to $0.25 per gallon for FY22. ADM is forecasting domestic ethanol demand at the 14-billion-gallon level, and for the export side of the demand equation in 2022, ADM is forecasting ethanol recovering to 1.4 – 1.5 billion gallons in exports. These projections were calculated before the announcement regarding E15, so these numbers stand to move much higher.

Over the last 60 days, the current year’s EPS estimate has inched up nearly 1% to $5.20 per share, and for the next year, the Consensus Estimate Trend has increased by a slight 1.2% up to $5.16 per share. Over the last four quarters, the company has an average EPS surprise of nearly 22%, and in its latest quarter, ADM beat estimates by 10%.

The current year's Zacks Consensus Sales Estimate of $86.5 billion reflects a marginal 1.4% year-over-year increase in the top line from 2021.  ADM is currently a Zacks Rank #2 (Buy) with an overall VGM Score of an A.

Anderson Farms

Anderson Farms (ANDE - Free Report) co-owns five ethanol plants in Indiana, Iowa, Kansas, Michigan, and Ohio that are collectively capable of producing over 545 million gallons of ethanol annually and are strategically placed closed to corn production. The company ships its ethanol via rail or truck to customers along with E85 automatically blended to ensure consistency and quality.

As one of the top 10 grain-holding companies in the United States, the company prides itself on services it can provide to the ethanol industry, including ethanol marketing, project development consulting, and plant operations. ANDE is a proud member of the Renewable Fuels Association (RFA), the voice of the ethanol industry, providing advocacy, authoritative analysis, and important industry data to its members. Additionally, ANDE is a partner with Marathon Petroleum, the nation’s largest ethanol blender.

Looking to strengthen its sustainability, the company opened a new ethanol plant in 2021, expected to be one of the lowest carbon and most efficient in the United States. Furthermore, it implemented energy reduction systems in ethanol plants through cogeneration facilities, substantially reducing power sourced from the power grid.

Over the last 60 days, analysts have been upping their earnings outlook for the current year, causing the Consensus Estimate Trend to climb a considerable 15% up to $2.64 per share while next year’s EPS estimate remains unchanged at $2.81 per share. ANDE has a four-quarter trailing average EPS surprise of an eye-popping 320%, and in its latest quarter, the company beat estimates by nearly triple digits, or 97%.

Sales estimates for the current year, sitting at $13.5 billion, reflect a year-over-year expansion in the top line of 6.3%. ANDE is currently a Zacks Rank #1 (Strong Buy) with an overall VGM Score of a D.

Green Plains

Green Plains (GPRE - Free Report) is a vertically integrated producer, marketer, and distributor of ethanol. The company is headquartered in Nebraska, and its 11 biofuel plants can produce roughly 1 billion gallons of biofuels annually. Additionally, it is the third-largest producer of ethanol in the United States.

Green Plains won the 2021 Ethanol Producer Magazine Project of the Year Award for completing upgrades related to reducing energy and water usage, lowering operating costs, and reducing its carbon footprint. The company is committed to protecting natural resources and complies with all related laws and regulations; all of its biorefinery locations are registered as Renewable Fuel Producers (RFS) with the U.S. Environmental Protection Agency. Additionally, all of the denatured fuel ethanol it produces is RFS compliant.

For the current year, EPS estimates have slipped a considerable 25% to $0.65 per share. However, next year’s EPS estimate has climbed a notable 4% up to $2.17 per share. Additionally, revenue from its ethanol operations grew nearly 45% year-over-year from 2020 to 2021.

Analysts are forecasting $2.9 billion in sales for the current fiscal year, a marginal 1.8% year-over-year increase. GPRE is currently a Zacks Rank #3 (Hold) with an overall VGM Score of an A.

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