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VeraSun (VSE) rises. VeraSun also sets.

Last Friday marked day three of the ethanol stock's trading in the public markets, and it brought the same thing that the previous day and a half did: more steady declines.

The IPO, riding the wave of speculative interest in energy alternatives to oil, was priced at $23 but on its debut Wednesday, it hit the Street running and soared as high as $30 -- a 30% premium and 58% above the $19 a share that investors were hoping to pay before underwriters jacked up the offering price.

By the end of the week, VeraSun's stock had fallen to $24.50, dropping 20% in two days, before recovering late in Friday's session and Monday to close at $25.84. The headlines that were so laudatory on the sunny first day of trading quickly soured as the stock ran out of gas.

And the ethanol that early in the week promised to be a strong contender to replace oil-based gasoline in cars had become, by week's end, a substance that may quickly be overproduced in the face of uncertain demand.

There were some decent numbers to impress investors in VeraSun's balance sheet. The company's prospectus lists its financials from 2003 --when it began producing ethanol in its Aurora, S.D., facility -- and it's managed to post an operating profit and a net profit every single year.

In 2005, VeraSun's revenue rose 26% to $235 million, although its operating profit fell 30%, due to an increase in costs of goods sold and SG&A expenses. That drove down its operating profit to 10% of revenue last year, compared with an 18% margin the year before.

But if the first quarter of 2006 is any indication, the company is seeing rising revenue accompanied by a sharp drop in costs. Revenue rose 146% to $110 million in the quarter ended March 31. That's nearly half the revenue brought in during all of 2005.

Cost of goods sold rose more slowly in the first quarter, at 122% while SG&A rose 83%. That helped give VeraSun an operating profit of $25.6 million, or more than six times larger than the operating profit a year before. Earnings per share stayed constant at 4 cents a share as the company issued more shares to finance its expansion.

So, VeraSun is in fine fiscal shape. And the $236 million that the company raised in the offering (the other $155 million went into the pockets of selling shareholders) will expand the facilities from those that the company currently operates in Aurora as well as another in Fort Dodge, Iowa.

VeraSun, which says it's the second-largest ethanol producer in the U.S., has the capacity to produce annually 230 million gallons of ethanol, or about 5% of the U.S. total capacity. A third facility that will begin operation in Charles City, Iowa, will bring VeraSun's annual capacity to 340 million gallons by next summer and 560 million by early 2008. In April, the company bought a 300-acre plot of land near Welcome, Minn., to build yet another facility.

The 560-million-gallon capacity would be 14% of the ethanol capacity that the 2005 Energy Policy Act is mandating. That law could help drive business VeraSun's way whether the open markets take to ethanol or not. It called for ethanol capacity to rise to 7.5 billion gallons by 2012, or nearly double the capacity for 2006. That act was passed before President Bush called for using more ethanol in autos last January.

VeraSun also has joint ventures with

General Motors

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to boost awareness of ethanol and gasoline-ethanol blends.

As encouraging as that sounds, it also speaks to the Achilles' heel of this fast-growing, well-managed company. Despite the highest gasoline prices in decades and constant headlines about Americans griping over the rising cost, there seems to be next to no will among consumers to switch to a blend.

There are many things that can curdle interest in ethanol -- least likely is a sudden drop in the price of good old gas. What's much more likely is that customer indifference or distribution glitches could slow the growth rate of ethanol sales to a rate that's slower than expected. And, as

Jim Cramer pointed out, a spike in the prices of natural gas, necessary to produce ethanol, would keep the ethanol bandwagon from even getting started.

There is also the question of overcapacity in the stock market -- that is, the coming onrush of shares of other ethanol companies like




, which are planning their own IPOs to finance expansion in the face of as-yet-to-be-determined demand among average Americans.

In some ways, if VeraSun's stock drops in the near term, it may be for the best in the long run. Should VeraSun continue to lag, it could discourage Aventine and Hawkeye from coming through with their own IPOs. If that happens, it leaves VeraSun with a larger piece of the ethanol-play in public markets.

If ethanol catches on, VeraSun may well be the most formidable player. The thing is: After it builds all those new ethanol facilities, will customers come? That is the question hanging over VeraSun's stock like a cloud.