Ethanol Shifts Share Prices Into Overdrive
Ethanol Shifts Share Prices Into Overdrive
By SCOTT KILMAN
April 13, 2006; Page C1
Wall Street is pumped up about ethanol.
The gasoline substitute emerged as a grass-roots investment movement last year, with farmers raiding their savings to build plants that convert corn into the renewable fuel. Now mutual-fund managers and well-heeled investors are grasping for any stock with the slimmest connection to ethanol.
With soaring gasoline prices, the spot price of ethanol -- an alcohol-based alternative fuel that is blended with gasoline -- has doubled over the past 12 months to about $2.65 a gallon. The Bush administration has been plugging ethanol in recent months, saying it could help break America's crude-oil addiction. Adding to the froth, billionaire Bill Gates has become an ethanol booster.
"It looks like a rush to me," said Elif Acar, a credit analyst at Standard & Poor's, which rates the ethanol industry as "speculative."
"I'm not sure the long-term prospects are being weighed," she said.
U.S. ethanol makers are either small parts of sprawling companies, start-ups or private concerns. So investors are flocking to a few stocks, sending their prices soaring. So, where does an average stock picker get in, since everyone is elbowing for a narrow doorway?
At the top of the heap is Archer-Daniels-Midland. Even though ethanol generates only about 5% of its revenue, shares in the Decatur, Ill., grain-processing titan have climbed about 50% so far this year, swelling its market value to more than $24 billion. In New York Stock Exchange composite trading at 4 p.m. yesterday, ADM's shares were at $37.39, up 84 cents, or 2.3%.
The run-up is largely because it is the biggest and most seasoned ethanol maker in a fledgling and fragmented industry. ADM produced about one billion gallons of fuel ethanol last year, roughly a quarter of the industry's production. It also plans to build a corn-to-ethanol mill in Columbus, Neb., capable of making 275 million gallons annually, eclipsing the capacity of its closest rival.
Hoping to cash in on investor interest, VeraSun Energy, of Brookings, S.D., and Aventine Renewable Energy Holdings, of Pekin, Ill., the second-largest and third-largest ethanol makers, respectively, both filed two weeks ago with the Securities and Exchange Commission to launch initial public offerings of their shares. The fourth-biggest producer is Cargill, the closely held commodity-processing titan in Minneapolis, which has plans to expand rapidly.
Impatient, some investors are snapping up shares of companies that merely have ethanol in their future. The stock of Andersons, a Maumee, Ohio, company with interests in grain, fertilizer and rail cars, began jumping two weeks ago as investors realized that it recently acquired stakes in three ethanol plants that are currently under construction. Since March 27, the market value of Andersons has swelled by about $145 million, or 28%, even though it has invested just $36.1 million in its ethanol holdings.
"Considering how fast the industry is growing, there just aren't that many places for investors to go in ethanol yet," said Neil Koehler, president and chief executive of Pacific Ethanol, an ethanol distributor that posted a net loss of $9.1 million in 2005 on sales of $87.6 million. The stock of the Fresno, Calif., company has nearly tripled since it announced in November that Mr. Gates, chairman of Microsoft, intends to invest $84 million in its plan to build five ethanol plants on the West Coast, giving him a 28% stake.
There are downsides. Ethanol makers, which generate about 3% of U.S. motor fuel, can do little to hedge their risks. They have a hard time passing along any rise in the cost of corn -- their single biggest expense in making the fuel -- because the price of ethanol is largely tied to the price of gasoline, since ethanol is primarily valued for its ability to substitute for the petroleum-based fuel.
That, in turn, is tied to the price of crude oil, which is currently high -- trading at close to $70 a barrel -- but difficult to forecast.
Wall Street, though, is mostly optimistic. For one thing, President Bush signed an energy act in August requiring the oil industry for the first time to use some renewable fuels to make motor fuel. The annual mandate grows to 7.5 billion gallons in 2012 from four billion gallons this year.
The energy measure also gave a sideways boost to ethanol. The measure denied the oil industry liability protection for a gasoline additive called MTBE, which many states are banning because of groundwater-pollution concerns. So oil companies are switching to ethanol, which, like MTBE, raises the amount of oxygen in gasoline so it burns clean enough to satisfy U.S. air-pollution standards. The switch could increase demand for ethanol by roughly two billion gallons annually, beginning this year, say ethanol executives.
By late January, a boom seemed under way to some stock analysts. Archer-Daniels-Midland reported that strong ethanol prices helped profit for the fiscal second quarter ended Dec. 31 rise by 17%, far in excess of Wall Street estimates. ADM also divulged that it has been diverting so much corn from its sweetener business to ethanol production that soft-drink companies had been forced to swallow stiff price increases for high-fructose corn syrup.
ADM has yet to capitalize fully on the recent run-up in ethanol prices. It sells much of its production under six-month-long contracts. Going forward, ADM should be able to lock in higher prices. "ADM has at least two years of growth ahead of it, unless gas prices collapse," said John McMillin, an analyst at Prudential Equity Group in New York. Mr. McMillin has ADM rated as "overweight," meaning he expects the stock to outperform the average of all the stocks he covers. He doesn't own any ADM shares, nor does Prudential Equity Group do any investment banking for ADM.
But the lofty price of ADM shares has some analysts concerned that the stock is attracting energy-oriented investors who might have unrealistic expectations for a company that is still mostly a maker of food ingredients, usually a thin-margin business.
Christine McCracken, an analyst at FTN Midwest Securities, worries that ADM's share price -- which is more than 20 times the average estimate of its per-share earnings for the fiscal year ending in June -- is getting too rich for a commodity processor. Over the past five years, ADM's shares have traded at 12 times its per-share earnings when profits were peaking. What's more, the shares of ADM's peer group are trading at a multiple of 13.5.
"I don't see it," said Ms. McCracken, who doesn't own any ADM shares, which she rates "neutral," essentially meaning hold.
Some economists are wondering whether the ethanol industry is growing so fast that it could be faced with a glut before too long. According to the Renewable Fuels Association, the ethanol trade group, 33 new plants are under construction and nine existing plants are being expanded. At this rate, the industry will have the capacity to make more than what Energy Department economists figure is needed for several years.
For ADM's part, Chief Executive and Chairman G. Allen Andreas figures the ethanol market has the long-term potential to grow to 15 billion gallons annually as the oil industry looks for ways to stretch capacity and the auto industry offers more vehicles that can run on an 85% ethanol blend.
Write to Scott Kilman at scott.kilman@wsj.com
Convert Modest Savings Into Steady Income for Retirement
One Way to Convert Modest Savings Into Steady Income for Retirement
April 5, 2006; Page D1
Americans tend to be an optimistic bunch -- except when it comes to their own longevity. They don't realize how long they might live, how ill-prepared they are for a lengthy retirement and how easy it would be to outlive their savings.
What to do? My contention: Many baby boomers could salvage their retirement dreams by buying immediate-fixed annuities, which would convert their modest savings into a healthy stream of lifetime income. As an added bonus, the recent rise in interest rates has boosted annuity payouts.
Yet income annuities are shunned by retirees, with sales stuck at a modest $5.3 billion in both 2004 and 2005. Indeed, if the emails I receive are any guide, many people think they could generate just as much income on their own. But that's a lot trickier than it seems.
• Running down. To understand what's at stake, imagine a 65-year-old woman with $100,000 to invest, trying to decide between high-quality bonds and an annuity that provides lifetime income. (These income annuities shouldn't be confused with tax-deferred variable annuities, the controversial product that allows folks to save for retirement by investing in a menu of mutual funds.)
If she purchases the annuity, she might get an annual income of $7,336, according to a quote for Vanguard Group's Lifetime Income Program. This quote is for income that's paid as a single annual sum, with the first payment made soon after the annuity's purchase.
The annuity may offer a heap of income, but it's also a nerve-racking investment. If our 65-year-old dies soon after buying, her $100,000 would be gone and she would have received scant income in return. Fearful that might happen, she instead sinks her $100,000 into the Vanguard Long-Term Investment-Grade fund, which was recently yielding 5.7%.
This fund would get hammered if interest rates rose sharply. Still, it is Vanguard's highest-yielding high-quality bond fund. There's also no charge to sell the fund, which is important. The reason: Our 65-year-old will endeavor to replicate the annuity's income by slowly selling off her fund shares.
That might seem like a safe strategy. For instance, in the first year, she would pull out $7,336 for spending money, leaving a fund balance of $92,664. That $92,664 would then grow 5.7% over the next 12 months, so she finishes the first year with $97,946. That's not much below her initial $100,000. In fact, even after 10 years, when she is age 75, her bond fund would still be worth over $73,000. From there, however, things start spiraling down.
The problem: She keeps pulling out $7,336 each year, but the amount of interest she earns keeps shrinking as her fund balance gets smaller and smaller. By age 88, she would be down to some $7,000 -- and unable to afford the next year's full withdrawal.
Today, a 65-year-old woman can expect to live until age 85. In other words, picking the bond fund over the annuity would be a problem if our 65-year-old woman lives more than three years beyond her life expectancy.
The numbers for a 65-year-old man tell a similar story. The annuity would pay $7,927 each year. If he tried to replicate that income by drawing down the Vanguard bond fund, he would run out of money at age 85. That's three years beyond the median life expectancy for a 65-year-old man.
• Living long. What percentage of 65-year-old men and women will live three years beyond their life expectancy? New York insurer MetLife puts the number at 39%. Make no mistake: For today's 65-year-olds, living until their late 80s is a distinct possibility -- and thus an immediate-fixed annuity could be a smart purchase.
These annuities, of course, hold the most appeal if you are in good health and family history suggests you will live a long time. Indeed, in pricing annuities, insurers assume buyers will live longer than average.
But even if you aren't sure you will live to a ripe old age, an annuity could still be a comforting purchase. If you stash maybe 25% of your portfolio in a lifetime-income annuity, that will give you some downside protection, allowing you to invest and spend down your other assets more aggressively. Intrigued? Here are five tips for immediate-fixed annuity buyers.
Get a fistful of quotes from your insurance agent or from a Web site like www.immediateannuities.com. There's often a wide spread in the income offered by insurers, so it pays to shop around.
Many annuity buyers opt for a guarantee, such as promised payments for 10 or 15 years. But I wouldn't bother, unless taking the guarantee involves only a tiny cut in the annuity's income. Instead, to eliminate the risk that you will invest a huge chunk in an annuity and die soon after, consider making smaller annuity purchases each year through the first 10 years of your retirement.
If you buy income annuities over time, that will also give you the chance to reduce risk by buying from different insurers. Even then, stick with top-rated insurers.
To protect against inflation, purchase an annuity where payments are linked to inflation or where your annuity check is stepped up each year by, say, 3%.
If you're married, consider a joint-life annuity, where the income is paid until both of you have died. Because you are insuring two lives, your annuity investment won't be wasted money if one of you dies prematurely. Buying a lifetime income stream could also be a smart move if you're worried about your spouse's ability to manage the household's finances after your death.
Study Challenges Tie of Estrogen Use To Breast Cancer
Study Challenges Tie of Estrogen Use To Breast Cancer
By TARA PARKER-POPE
April 12, 2006; Page A1
For years doctors have warned that using the hormone estrogen during menopause puts a woman at higher risk for breast cancer. Now data on thousands of women suggest that the warning may have been unnecessary.
Investigators in the federally funded Women's Health Initiative found that using estrogen doesn't increase the risk of breast cancer and may even lower it. Estrogen users were 20% less likely to develop breast cancer after an average of seven years taking the drug than women taking a placebo, according to results being reported today in the Journal of the American Medical Association.
The 20% figure isn't statistically significant and by itself doesn't support the use of estrogen to prevent breast cancer. But the study's data do give much-needed reassurance to millions of women who take estrogen to treat menopause symptoms or cope with the effects of a hysterectomy.
The results also raise questions about the safety of another hormone, progestin, which many women take with estrogen. Doctors started adding progestin to the hormone mix in the 1980s to help avert a form of uterine cancer. But the new data, combined with earlier Women's Health Initiative results, suggest that progestin may be the culprit in raising breast-cancer risk.
"The breast-cancer story seems to be different from what we thought,'' says Marcia Stefanick, the Stanford University professor who has led much of the WHI research.
Like many results from the $750 million Women's Health Initiative, the new estrogen data won't escape controversy. The WHI studies have been plagued by design challenges and differing interpretations of the data. In the latest study, more than half of the 10,739 postmenopausal women in the study stopped taking their pills. Most of the women were also overweight, a factor known to influence breast-cancer risk.
The National Institutes of Health stopped the estrogen study earlier than planned, leaving the researchers tantalizingly short of firmer answers about estrogen and breast cancer. As a result, some researchers say it's a mistake to exonerate estrogen just yet.
"This is just one of these flukes because every other bit of information we have tells you that estrogen increases risk of breast cancer in postmenopausal women,'' says Malcolm Pike, a professor of preventive medicine and a longtime hormone researcher at the University of Southern California's Keck School of Medicine. "The notion that says this one study can turn over every other piece of scientific evidence we possess is nonsense."
The WHI, begun in 1991, is the largest randomized clinical trial of women's health and has studied everything from low-fat diets to vitamin D. Unlike earlier large-scale studies, it randomly assigned women to take hormones or a placebo, providing a scientific way to measure the effects of hormones-taking.
Since the 1960s, women have increasingly used hormones to cope with menopause symptoms such as hot flashes, which are triggered by fluctuating levels of a woman's natural estrogen due to aging. The hormones undoubtedly relieve symptoms for many. The question has always been how the drugs influence the risk of health problems -- particularly the two biggest killers, cancer and heart disease.
The first part of the WHI raised alarms on both counts. In that part, researchers studied 16,608 older women, half taking estrogen plus progestin and the other half taking a placebo. The study was stopped early in July 2002 when safety monitoring showed that the hormone users had more heart attacks and breast cancer. Some researchers challenged the data, citing design questions including the predominance of older women in the study. Still, the breast-cancer finding seemed solid because it was in tune with earlier studies.
After the first part of the WHI was stopped, researchers continued a parallel WHI trial, which compared women who took estrogen alone against those taking a placebo. These women all had undergone a hysterectomy, or removal of the uterus. That meant they weren't at risk for cancer of the endometrium, the lining of the uterus. Since the only reason for taking progestin was to prevent endometrial cancer, these women didn't need it.
Many scientists expected that the breast-cancer risk from estrogen alone would resemble the risk from estrogen plus progestin. That view was based on several important studies in the mid- to late 1990s in which researchers tracked the health habits of women over time without dictating any particular treatment. These observational studies linked estrogen use by itself to a higher risk of breast cancer.
Thus the surprise at the new results: Far from raising breast-cancer risk, estrogen seems to offer a slight protective effect. When an initial version of the findings was published in April 2004 in JAMA, many researchers dismissed the data as a statistical anomaly that was likely due to chance.
After WHI investigators subsequently submitted a more-detailed analysis of the breast-cancer data to JAMA, reviewers for the medical journal continued to raise questions. Hormone use changes the way the breast looks in a mammogram and could make it harder to spot tumors. The reviewers wanted to be sure they were really seeing fewer cases of cancer in the estrogen takers and wanted more details about the mammograms and breast biopsies. All the questions delayed publication until today.
"It's a lot harder to publish something that goes contrary to what people believe,'' says Dr. Stefanick.
At this point, the WHI investigators don't believe women should use hormones to prevent breast cancer. Nonetheless, some additional analyses raise the possibility that estrogen may in fact offer protection. Because 54% of women had stopped taking pills by the study's end, investigators decided to also analyze data from just those women who consistently took their medications. Among these women, breast cancer risk was lowered by 33% -- a trend that is considered statistically valid. When investigators looked at specific cancers, estrogen appeared to lower risk for ductal carcinoma -- the most common type of breast cancer -- by 29%.
Why did earlier studies show opposite results? One answer may be that hormone users in earlier studies were more likely to get mammograms, says Rowan Chlebowski, a WHI investigator and breast-cancer researcher at the University of California, Los Angeles. Doctors would have found more cancer in estrogen users simply because they were looking harder.
In fact, one earlier study supports the new results. A little-noticed 2003 study in the Journal of Clinical Oncology looked at the mammograms of nearly 375,000 postmenopausal women. Women who used estrogen for five years or more were 8% less likely to be diagnosed with breast cancer compared with nonusers.
Still, several quirks in the WHI study population are likely to raise debate. Nearly half the women in the estrogen-only study were obese, so it's possible that the results are less applicable to thin women. The reason: Fat is a source of estrogen, and it may be that overweight women have so much natural estrogen from fat that adding more from pills doesn't make much difference.
Also, 41% of the women in the study had both their ovaries removed, a practice that can lower breast-cancer risk. Women in the WHI studies used Premarin, a complex mixture of estrogens derived from horse urine that may work differently than other forms of estrogen on the market.
The WHI study of estrogen-only users was supposed to continue through 2005 but officials at the National Institutes of Health stopped it a year early in February 2004. Although an independent safety monitoring board had narrowly decided that the study could continue, the NIH overruled it, citing a slight increase in stroke risk among the estrogen users.
In hindsight, the early end to the study made it harder to reach conclusions about estrogen and breast-cancer risk. Dr. Chlebowski says it would be "nicer" to have the data from the extra year. "The investigators wanted to keep the study open," he says, but the decision was the NIH's to make.
NIH director Elias Zerhouni says the agency consulted outside experts as well as the safety board and investigators. He says the data about stroke and blood-clot risks had to take precedence over the still-unclear breast-cancer data, which "was really counter to what we know about estrogens."
"We weighed the risk-benefit and decided it was time to protect the patients rather than look at potential positive data on the breast cancer side," says Dr. Zerhouni. "A trial when you're dealing with healthy people has to have a much lower tolerance for complications."
The WHI estrogen results could fuel new avenues of research into the role estrogen plays in breast cancer. Scientists already know that certain breast cancers thrive in the presence of endogenous estrogen -- the kind made by a woman's body. Medications such as tamoxifen or new aromatase inhibitors help stave off breast cancer either by blocking natural estrogen's effects or interfering with production of it. Yet doctors also sometimes use high doses of estrogen to treat breast cancer in certain patients.
How could adding estrogen to a woman's body possibly reduce her risk for breast cancer? Scientists think a woman's natural estrogen may affect breast-cancer risk differently than estrogen taken in the form of pills, patches and creams. However, researchers say the issue needs much more investigation.
The new results are also likely to make doctors take a harder look at progestin. Its use took off in the 1980s, after women were frightened away from estrogen because of reports that it dramatically raised the risk of uterine cancer. To solve the problem, doctors began prescribing progestin, which was known to blunt the effects of estrogen on the uterus, thereby preventing endometrial cancer.
But in trying to prevent one form of cancer, doctors may have inadvertently raised the risk of another. "It was an accepted dogma that estrogen was the bad guy for the breast and endometrium," says Kent Osborne, director of the breast center at the Baylor College of Medicine in Houston. "Now it's turning out that it's progestin that's bad for the breast and estrogen that's bad for the endometrium."
Recently some doctors have tried giving progestin only a few times a year rather than every month. This may be enough to protect the uterine lining from precancerous changes without exposing women's breasts to the long-term effects of progestin.
"I'd like to see a shift in this country away from using so much progestin," says Hugh S. Taylor, an associate professor at Yale University School of Medicine. "Many ob-gyns are thinking this but they are afraid to do it."
Write to Tara Parker-Pope at tara.parker-pope@wsj.com
