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Glycerin To Ethanol Details

Two weeks ago I posted about an ethanol production breakthrough at Rice University and I promised more info when I got it. I recently spoke with Ramon Gonzalez, the William Akers Assistant Professor in Chemical and Biomolecular Engineering about his breakthrough.

Here is the math. We have a 100 mgpy biodiesel plant. In our production of the biodiesel, one of the by products is glycerin. Currently, most producers must pay to have it disposed of. Now, using Mr. Gonzalez’s methods, they can convert it to ethanol.

100 mgpy of biodiesel produces roughly 75 million pound of glycerin. That glycerin can be converted into ethanol at a cost that is 40% cheaper than the current corn to ethanol cost (about 40 to 45 cents a gallon). How much ethanol? 75 million pounds of glycerin would produce about 9.3 mpgy of ethanol. Now, the ethanol production from glycerin would produces as a by-product “performance acids” that can used in then production of fuel cells.

We now have a process that takes the cost of disposing glycerin and turns it into a profit of roughly $13 million dollars for the biodiesel producer. This profit, it should be noted does not take into account the ancillary sales of the other by-products.

Currently the technology is in the hands of Houston VC’s and a production facility is expect to be operational next year as “several” companies have contact Professor Gonzalez about using the process.

The U.S. biodiesel industry is expected to produce an estimated 1.4 billion pounds of glycerin valued at $289 million between 2006 and 2015, according to an economic study by John Urbanchuk, director of LECG Inc. According to projections gleaned from NBB estimates, the industry could produce as much as 200 million pounds this year alone.

This 200 million pounds would produce an additional 17 million gallons of ethanol this year, not a huge number, but it does make biodiesel production dramatically more profitable which will invariably lead to more producers entering the market.

Crude glycerin that once fetched between 20 and 25 cents per pound is now edging closer to 5 cents and lower. This is down from the high of $1.08 in 1996. The glut and pricing pressure have led Dow Chemical (DOW) to close it’s 150 million pound per year facility in Freeport, Texas.

Ethanol giant Archer Daniel’s (ADM) had previously put glycerin facility plans on hold at the turn of the century as prices collapsed. ADM will produce an estimated 250 mmgpy of biodiesel in the US by the end of 2008 which equates to 188 million pounds of glycerin. ADM could convert that to an additional 16 million gallons of ethanol and other by products for sale that it either now pays to dispose of or received very little n return for. This is only US production numbers, ADM is also Europe’s largest biodiesel producer.

Every time we get an alternative source of ethanol production, we widen the possibilities and lessen our dependence on oil. Good

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Top Stories VIN – June

First, my apologies for dropping the ball last week and not getting to this. Here are the top five stories as voted on my readers at Value Investing News

1- Remembering the Wisdom of Keynes and Twain Controlled Greed

2- Chipotle Mispricing Persists: Berkshire Ruminations

3- Fly, Don’t Buy Airlines: Contrarian Edge

4- PBS Interview with Nassim Taleb PBS

5- Monish Pabrai Interview: MSN Video

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This Weeks Insider Buys

Here are the largest insiders buys for the past week. As Peter Lynch once said “There are multiple reasons insiders sell shares but there is only one reason they buy, they think the stock price is going up”.

Company and aggregate dollar amount of insider purchases:

1- Biofuel Energy (BIOF) = $45,000,000

2- Franklin Bankcorp (FBTX) = $4,000,000

3- Chesapeake Energy Corp (CHK) =$3,500,000

4- Micromet Inc (MITI) =$2,400,000

5- Occulogix Inc. (OCCX) =$2,000,000

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ValuePlays Most Read Posts For June

Here they are, the most read posts for the last 30 days.

1- Finally An Analyst Call That Makes Sense (SHLD)

2- Google: Overkill Reached 6 Months Ago

3- Lampert Buying More Sears Shares

4- Wal-Mart Getting Real Hard Not To Buy

5- Apple: iPhone Making All The Wrong Moves

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This Weeks Notable Dividend Hikes

Here are the notable dividend hikes for the week:

1- Neuberger Berman Real Estate(NRO)= 53%

2- Best Buy (BBY)= 30%

3- Felcor Lodging Trust (FCH)= 20%

4- Village Supermarket (VLGEA)= 16%

5- Peoples Financial Corp (PFBX)= 16%

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Today’s Upgrades / Downgrades

Here are the late Friday analyst calls:

Komag KOMG Caris & Company Below Average » Average

Apollo Group APOL BMO Capital Markets Market Perform » Outperform

Western Digital WDC Needham & Co Buy » Strong Buy

Heelys HLYS CIBC Wrld Mkts Sector Perform » Sector Outperform

Phillips-Van Heusen PVH Matrix Research Hold » Buy

Ralcorp Holdings RAH BB&T Capital Mkts Hold » Buy

Diodes DIOD UBS Neutral » Buy

Research In Motion RIMM Morgan Keegan Mkt Perform » Outperform

Solectron SLR RBC Capital Mkts Underperform » Sector Perform

Komag KOMG JP Morgan Underweight » Neutral

Ariba ARBA CIBC Wrld Mkts Sector Underperform » Sector Outperform

DOWNGRADES:

Packeteer PKTR JMP Securities Mkt Perform » Mkt Underperform

Cascade CAE DA Davidson Neutral » Underperform

Omega Protein OME DA Davidson Buy » Neutral

Topps TOPP Wedbush Morgan Strong Buy » Buy

Rural/Metro RURL B. Riley & Co Buy » Neutral

Guitar Center GTRC Dougherty & Company Buy » Neutral

Ceragon CRNT Ferris Baker Watts Buy » Neutral

Pinnacle West PNW BMO Capital Markets Market Perform » Underperform

Getty Images GYI Matrix Research Hold » Sell

Barnes & Noble BKS Matrix Research Buy » Hold

Endurance Specialty ENH Stifel Nicolaus Buy » Hold

Castle Brands ROX Oppenheimer Buy » Neutral

Corn Products CPO BB&T Capital Mkts Buy » Hold

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NetFlix Answers Blockbuster

On June 13th I wrote in response Blockbuster’s (BBI) announcement they were cutting rental fees, “What happens if today Netflix (NFLX)comes out today and matches these new prices? It did not take very long as Netflix announced yesterday they lowering their prices to match those at Blockbuster.

Netflix is now charging $13.99 a month to rent up to two DVDs at a time, down from $14.99 previously. The service mails another DVD after subscribers return one of their other discs in postage-paid envelopes. This matches the plan Blockbuster announced three months ago. Blockbuster did say it plans to close 282 stores in the U.S. this year to improve operating margins and expand domestic share, according to a SEC filing.

So were are right where we were 3 weeks ago at Blockbuster except they have now voluntarily decreased their revenue. Revenue is not the main problem at Blockbuster, costs are. What would have made more sense was to leave the pricing where it was and accelerate the store closings. 282 stores, while a good start is just a drop in the bucket. They cannot compete with Netflix on price because their cost structure is just too high, reduce it, and they may have a chance. They are going about this backwards.

What is Blockbuster going to do now? Pay us to rent DVD’s from them?

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Today’s Upgrades / Downgrades

Here are today’s analyst calls

UPGRADES:

NetLogic NETL UBS =Buy

Fluor FLR JP Morgan =Overweight

Research In Motion RIMM JMP Securities =Market Outperform

Santarus SNTS Friedman Billings= Outperform

Fannie Mae FNM Citigroup= Buy

Research In Motion RIMM RBC Capital Mkts=Top Pick

DOWNGRADES:

PMI Group PMI UBS= Neutral

MGIC Investment MTG UBS =Neutral

American Home Mortgage AHM Friedman Billings =Underperform

TIM Participacoes TSU= Market Perform

Chordiant Software CHRD JMP Securities= Mkt Outperform

Komag KOMG Robert W. Baird =Neutral

Komag KOMG Deutsche Securities =Hold

Palm PALM Deutsche Securities= Sell

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Natural Gas Price Drop Will Boost Ethanol Profits

I think we have all read with nauseating frequency how high corm prices are shrinking margins for ethanol producers (the irony here is that these very same producers are reporting record results). What we have not read is how multi year low natural gas prices should provide another boost to earnings. Guess what, now you are.

August natural gas touched $6.68 per million British thermal units today (Thursday), the contract’s lowest level since late May of 2005. It was last down 5.7%, or 40.3 cents, at $6.68, after the Energy Department reported a bigger-than-expected rise in last week’s natural-gas supplies. During its tenure as the near-month contract, the futures contract for July delivery at the Henry Hub posted a decline of $1.012 per MMBtu or nearly 13 percent. Natural gas in storage was 2,443 Bcf as of June 22, which is 18 percent above the 5-year average (2002-2006).

Nearly 95 percent of U.S. ethanol distilleries use natural gas boilers. Citigroup analyst Gil Yang estimated 28 billion cubic feet of natural gas would be consumed for every one billion gallons of ethanol produced.

The cost of producing ethanol varies with the cost of the feedstock used and the scale of production. Approximately 85 percent of ethanol production capacity in the United States relies on corn feedstock. The cost of producing ethanol from corn is estimated to be about $1.10 per gallon. Although there is currently no commercial production of ethanol from cellulosic feedstocks such as agricultural wastes, grasses and wood, the estimated production cost using these feedstocks is $1.15 to $1.43 per gallon.

The second largest cost in ethanol production, second to corn is the cost of energy, generally natural gas. Energy costs typically make up about 15 percent of a dry-mill plant’s total costs. for large producers like ADM (ADM), Verasun (VSE), The Andersons (ANDE) and Pacific Ethanol (PEIX), the costs run well into the millions.

A glut of natural gas is expected on the market soon. So much in fact, Dow Chemical (DOW), a prolific user of the stuff is not signing any new natural gas contracts in the near future in anticipation of a “dramatic fall” in prices as large amounts of new production comes on line.

What does this mean for ethanol producers? It would appear we are at the peak of the cost cycle for them. A record corn harvest is coming in better than the most optimistic projections and this has caused corn prices to fall over 11% since their February highs. With natural gas falling and no real impetus to reverse that, we have declining input costs and with gas prices having no reason to fall, a steady or rising price for the finished product.

All in all a nice scenario.

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"Fast Money" 6/28

Here are today’s picks and results to date:

Today’s Picks

Macke- Ford (F) Open $9.49

Najarian- Immersion Corp (IMMR)Open $14.37

Adami- Dell (DELL). Open $28.45

Bolling- Chevron (CVX). Open $84.14

Yesterday’s Results:

Macke liked Petsmart Inc (PETM)= Open $32.59 Close $32.41 Loss $.18 and Guitar Center (GTRC)= Open $59.98 Close $59.81 Loss $.18

Najarian liked Dendreon Corp (DNDN)=Open $7.17 Close $7.29 Gain $.12

Adami- Research In Motion = (RIMM)= Open $163.45 Close $193.99 Gain $30.54

Bolling picked USEC Inc (USU)= Open $21.80 Close $21.89 Gain $.09

Records:

Since my tracking began on 6/21 (1-1 means one up pick and one down pick)

Adami= 2-4 Gain $29.14
Bolling= 3-3 Loss $1.63
Najarian= 4-2 Gain $1.62
Macke= 5-4 Gain $6.30
Seymore= 1-0 Gain $.35
Finerman= 0-1 Loss $.18

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RIMM Blows The Doors Off

Reaearch in Motion (RIMM) just reported and it’s results have pushed the stock up 13%.

1.2 million new people activated a blackberry last quarter and RIMM shipped 2.4 million units. Earnings that had been estimated at the high end, $1.06 a share actually came in at $1.17 a share, a 74% jump over last year. The company also announced a 3 for 1 stock split effective August 20.

Revenue were estimated at $1.06 billion and came in at $1.082 billion vs $613 million last year. It look like initial result do not that many people holding off a new phone purchase for Apple’s (AAPL) iPhone.

“We are starting fiscal 2008 with strong operating performance, including record revenue, earnings and subscriber results,” said Jim Balsillie, Co-CEO at RIM. “After completing our first billion dollar quarter, we are now preparing to ship the 20 millionth BlackBerry handset this summer. This growth is a testament to our strong portfolio of products and services and our successful channel expansion. We look forward to the remainder of the year in which we anticipate continued growth within both North American and international markets.”

A good product, priced reasonably and available on all carriers. A novel little idea.

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Starbucks: It’s a Matter Of Price

Here is a post from Georges Yared that references my Starbucks (SBUX) post from June 21st. In it he disagrees with my opinion people avoid shares now and I think does a wonderful job laying out his reasoning.

Mr. Yared finishes his post saying “I believe Starbucks can earn $.87-.88 for this fiscal year ending September 30th and $1.08-1.10 for fiscal year 2009. Cost management without sacrificing the customer experience is vital to its success and ultimately its stock price. Starbucks has never missed a quarterly expectation…yet. The stock still carries a premium multiple, deservedly: but it has to be earned every quarter.

Starbucks needs to weather this storm and resume its growth trajectory if it has any hope of attaining a $50 billion market cap and beyond. The first hurdle must be cleared.

I believe the stock is a buy here at $26 for the patient investor. With execution of its detailed business and growth plan, the shares should maintain a premium valuation and look for a $35 price target over the next 9-12 months.”

I do not think we disagree very much. On May 18th I wrote:

“So what price then? Shares have to fall substantially from here before anyone should consider them. As the chart below illustrates, Starbucks has traditionally sold at a slight premium PE (1.25 to 1.5 times) to it’s growth rate.

eps % PE ratio
1996 20 50
1997 50 49
1998 22 46
1999 27 50
2000 29 47
2001 28 45
2002 22 39
2003 21 36
2004 41 40
2005 27 43
2006 20 46

Of the times it did sell at more than that (2+ times), the following year featured increasing growth “justifying” that “froth”. The aberration in the PE vs. growth rates trend has been from 2005 on. 2006 featured dramatically slowing growth for the second consecutive year and an increasing PE over the same time span. This was the genesis of my original post (in January) and shares since then have acted accordingly down 20%.

With that rate at this year at MAYBE 18%, its current 31 PE has shares grossly over valued. A price range of $22 to $27 put us in a historic PE to Earnings Growth range. Now, that also assumes they hit the 18% EPS growth this year which I am doubting more as each day passes.

With all the uncertainty surrounding the company at this point, I could not even begin to consider shares at any price other than the lowest end of the range, $22 or another 21% lower than current prices as I expect EPS growth to slow more.”

When I wrote that, shares sat at $29 and now have fallen to $25 to $26 range. While I do agree with Mr. Yared that Starbucks has wonderful growth potential, I do feel shares will continue to fall during the summer and may collapse (if only briefly) if Starbucks misses this quarters earnings estimates. I think this is a very real possibility. I still would be a buyer in the $22 range but would be reluctant to jump here.

Now, if word got out that CEO Jim Donald was being asked to find employment elsewhere, that might be enough to get me to bite at these levels. Barring that, I’ll wait.

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Monsanto Delivers

I previewed Monsanto’s (MON) earnings Monday saying “I would be shocked to see anything but a meet or a beat” and today they reported and delivered.

From the release:
“Key drivers for the quarter were increased corn seed and traits revenues in the United States, as well as higher sales of Roundup and other glyphosate-based herbicides in the North America and Europe-Africa regions.”

Good News For Corn Prices:
“Currently, reports from the U.S. Department of Agriculture (USDA) note that the majority of corn, cotton and soybean varieties are facing good crop growing conditions with the vast majority of these crops already having emerged. Monsanto continues to see strong customer demand for its branded corn seed products in the U.S. corn seed market. The company is also seeing strong customer demand for its branded corn seed products in key countries in Europe particularly in Italy, France and Germany.” This should help ethanol producers like ADM (ADM), Pacific Ethanol (PEIX) and Verasun (VSE)whose shares have been held back by the specter of high corn prices and worries about the crop conditions.

During the quarter Monsanto saw increased U.S. corn seed and traits revenue as strong customer demand for its branded corn seed products contributed to a sixth consecutive year of market share gains in the U.S. corn seed market. The increase could be as large as 4 or 5 percentage points, which would be the largest historical one-year gain for Monsanto in the corn seed market.

It seems the only thing that could dampen momentum at Monsanto would be an ethanol breakthrough that diminished to thirst for corn.

More on that tomorrow…..

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Here Is What the Fed Will Say:

The talking heads have spent the entire morning pontificating about what the Fed will after their meeting. Want to know?

Inflation and Interest Rates:
“The incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. However, in the statement accompanying last month’s policy decision, the FOMC again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected and that it is prepared to take action to address inflation risks if developments warrant”.


Economy:

“The U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. The central tendency of those forecasts–which are based on the information available at that time and on the assumption of appropriate monetary policy–is for real GDP to increase about 2-1/2 to 3 percent in 2007…”

Housing:
“We have not seen major spillovers from housing onto other sectors of the economy,”

Business:
“The business sector remains in excellent financial condition, with strong growth in profits, liquid balance sheets, and corporate leverage near historical lows. Last year, those factors helped to support continued advances in business capital expenditures.”

How can I be so sure? Easy. He has been saying the same thing since February. The absolute worst thing that could come out of this meeting is a rate cut. That would mean the risk of a recession is now outweighing the risk of inflation and this scenario is bad new for everyone.

No matter what is said I am sure CNBC’s Steve Leesman will spent three hours debating the significance of the words “should” vs “will” or “more likely” vs “likely” in the statement. These folks fail to understand Greespan has left the building and the deciphering his statements required is no longer necessary. What the Bernanke Fed says it what it means, no guesswork necessary.

Now, the market and it’s participants have not fully accepted this yet and it will jump around as the statement comes out and people try to extrapolate some hidden meaning that just is not there. Watch for the Dow Jones, S&P 500 and Nasdaq to jump around. Don’t worry, sooner or later they will figure it out.

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On Tops and Bottoms

The day before the private equity monster Blackstone’s (BX) IPO I wrote “If there was a huge upside to these folks I do not think they would be cashing out and subjecting themselves to all the increased scrutiny a public company goes through.

I will stay away..

Shares, after hitting $37.98 immediately after they began trading have slowly receded and now sit at $29.92 for a 21% decrease in 4 trading days. Do I have a crystal ball? No. This one was easy, when billionaires decide to sell us common folks “a taste” it is usually only because they see more up side in selling it to us that keeping it for themselves.

Carl Ican, in an interview on CNBC yesterday said when asked about private equity “easy money and cheap deals are going away and this will severely impact earnings at private equity”. When you add the specter of a tax increase from 15% to 35% on these entities, it is no wonder they are racing to cash in before we all realize they are due to earn much less in the immediate future. This probably also explains why the other private equity IPO, Fortress Investment Group (FIG) which began trading at $31, now sits at $23.25, a 25% loss.

In 1999 and 2000, everywhere you went the talk was about the Nasdaq, tech stocks and the internet. The level of people who made a living “day trading” from their bedrooms skyrocketed. Shares of companies like Yahoo! (YHOO), Dell (DELL), EMC (EMC)and Cisco (CSCO) all were household names that traded with valuations in the stratosphere. When your mailman, paperboy and the 16 year old kid bagging your groceries are talking about the next tech IPO and how it should double the first day, you need to take a step back. When they are throwing around terms like “click through”‘, “routers”, EBITDA and have no idea what those mean, be very afraid. Not long after the market began a two and a half year slide that the Nasdaq has still not recovered from.

In late 2003 people had finally had it with the stock market and accounting shenanigans and began flooding the real estate market with money. Stock valuations, despite an improving economy and growing earnings hit low levels not seen in a long time. The same mailman, paperboy and grocery bagger were all now talking about how stocks are a losing game and that the market was “rigged”. This of course signaled the bottom of the market and stock have climbed steadily ever since.

In early 2006, the number of real state agents in the US hit an all time high. Filled with sugar plum visions of real estate riches, potential agent flooded the market to get in on the action. This of course signaled the top of the market and real estate values (and the number of active agents) have plummeted since.

So where are we at today? Housing. It has to be near a bottom. I cannot pick up a newspaper, watch TV or go anywhere with hearing about the “awful” real estate market. Yesterday I was in BJ’s (BJ) and listening to a conversation between a 70 year old women who I was behind in line and the kid at the checkout. They of course were chatting about housing as he rang up her groceries and throwing around terms like “subprime mortgage meltdown” and “foreclosure rate”. When it was my turn to check out, I asked “what is a subprime mortgage”? The reply came with a look that could only imply I was quite possibly to dumbest person on the face of the earth. He said “it’s a mortgage that is not prime”.

Right…. smells like a bottom to me

Is it today? Tommorrow? Next month? Who knows, but it is near. How to play it? Home builders are a tough one. Valuing individual companies gets into a lot of guesswork based on the value of their landholding and the demographics of the region in which they do business. Also, they may make a sale today that gets canceled in three months that causes an earnings outlook revision. If investing here I would look at the iShares Dow Jones US Home Construction ETF (ITB) that began trading in May 2006 (another sign of the top) and is currently down 35% since it started. The index is a free-float adjusted market capitalization-weighted index. It measures the performance of the home construction sector of the United States equity market and includes companies that are constructors of residential homes, including manufacturers of mobile and pre-fabricated homes.

It will give you exposure to the whole housing market and avoid the individual companies potential pitfalls.