Pacific Ethanol - PEIX earnings report is due next week. Moment of truth!

Pacific Ethanol (PEIX) earnings report is due next week. 

This is the MOMENT OF TRUTH!

From here forward the stock price for Pacific Ethanol will likely not look back and be at these levels for years to come. If earnings come out Monday morning July 21st this stock should see a nice bump in price.

But what's happening now and how high is it likely to go? With PEIX likely to hit 1 billion in revenue thanks to incredible circumstances of low corn prices, high ethanol prices, and excellent internal metrics in place to reap large profits, the stock is seriously undervalued. But the value of the stock is not the only factor of where the price will go.

"Why is that," you may ask? The sentiment of the stock has changed dramatically since the last earnings report fiasco. To catch those who aren't aware of the circumstances last quarter, here's what happened.

Pacific Ethanol was doing everything right and also reaping the benefit from a very good corn crop and favorable prices on Ethanol. They paid off debt which saved them millions, re-opened their final Madera plant which added 20 million in production. More recently they were added to the Russell 2000, 3000, and Global indexes, have seen institutional investment skyrocket, added Wet Distiller's Grain as a bi-product they sell, as well as many other positives which all have caused the stock price to spike from Q4 to Q1 earlier this year.

But that's not the whole story. Pacific Ethanol had quite a few warrants outstanding which are just shares they have promised to sell based on a set price. Whenever a stock price jumps significantly GAAP accounting principles require what's known as a Fair Market Value adjustment to be made to these outstanding warrants. Since the price of the stock jumped so much (over $10 per share) Pacific Ethanol had to show a loss of over $10 per share for each share. This is what's known as a non-cash expense. And it doesn't at all tell the whole story as there was no money lost. Quite the contrary, their accounts had never been fuller. But due to this GAAP accounting principle, the Earnings Per Share (EPS) were made to look like a HUGE loss had occurred instead of the giant gain they had seen. The stock tumbled from the mid 15's to the 10 dollar range on the initial reports due to most investors only looking at the EPS reports of a huge loss and not looking deeper into the financials to see that this was the best quarter they've posted in 5 plus years.

Fast forward to today. This quarter has been as good or better than the last, however, we do not have a fair market adjustment that will significantly hit the books as the stock price was relatively the same at the end of
Q2 as it was for Q1. This means the turn around should be gigantic from what we saw last quarter.

But this doesn't answer where we're going. Their is more to consider. Since the stock price collapse after Q1 earnings, people have been educated on the warrants issue and the non-cash expense and now understand this was not the whole story with the company. Due to this education, the stock price has rebounded and is threatening its 52 week high. 

The question is, have enough investors figured out the truth about the stock and has that already baked into the current price, OR are people still in the "wait and see" mode and want to make sure earnings are as predicted before they buy in for the ride up to $40 per share.

Certainly, the word has spread - the loss from last quarter was not an accurate depiction of the company's success recently. But has this message spread to most of the stock holders or just a few well informed ones? If it's most of the people, then we may not see a giant rise on the earnings next week as they've already bought on the knowledge. I however, suspect it's more likely we will see a large rise in the price. I think we're likely to hit a price as high as $30. I think the $25 to $30 range next week is not out of the question.

I'm honestly hoping for a lot more. This next week will be one of the most interesting weeks for this company since Bill Gates was one of the early investors.

Nick