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With President Bush's acknowledgement of the need for ethanol to play a larger role in the energy market of the United States, investors wanting to cash in on this opportunity must first understand the possible investments. In the US, Ethanol is primarily a product of corn, and as discussed in a previous article, corn based ethanol is a poor substitute for sugar based ethanol (see When Bad Ideas Become Worse Ideas). In the rest of the world however, sugar based ethanol is starting to catch on as a viable energy alternative. In Brazil, gas stations sell both petrol and ethanol, and automobile manufacturers have now developed flex-fuel vehicles which can use both products equally well. As compared to corn ethanol, sugar ethanol produces 6 times more energy, and is much cheaper to produce. How can an investor benefit from the future possibilities of ethanol? One way to play this is to invest in ethanol futures. While this is not a bad idea, the need for easy distribution of the product along with increased demand from consumers may take quite a bit of time. It requires consumers to desire such flex fuel automobiles and the ability for gas stations to easily provide the product. While in Brazil this market may be ripe for growth, the rest of the world lacks the infrastructure necessary for immediate growth. An investment in ethanol futures will one day pay huge dividends, but that is unlikely to happen in the short term. Perhaps a better play would be to invest in a company that is one of a kind in its class. While flexible fuel vehicles in Brazil are being made by several manufacturers, there is only one company in the world that has been able to develop a plane that can be fueled by pure ethanol - Embraer (NYSE: ERJ). A Brazilian company in the traditional sector of plane manufacturing, Embraer has billions of dollars in backlogs from its traditional business unit. Several North American airlines have begun to place orders with Embraer as opposed suppliers such as Boeing. In addition, Embraer's ethanol plane technology has caught the eye of small plane operators everywhere. While currently only available on the smallest of planes, the technology carries with it a promise that could one day help the dismal airline sector which has been suffering from intense competition and rising jet fuel prices. Customers of the ethanol jet having been raving about the amount of money saved off fuel costs. With a solid balance sheet, and a healthy dividend, the Embraer is in good financial standing. Embraer (ERJ) is in a unique position to take advantage of the future potential of ethanol. While the market may still be quite new for Embraer, they currently have no competition, and their ability to leverage capital, expertise, and customers from their traditional business unit makes an investment in this company the best ethanol play of the immediate future. |
