Morgan Stanley is out with a note today stating that VeraSun Energy (VSE) beat consensus and their Q2 estimates by a wide margin yet they still rate the stock equal weight due to the "tough ethanol market."   That being said Morgan Stanley believes VSE has the best risk reward profile among the pure play ethanol producers. 

Morgan Stanley also reported, "Given our outlook for increased industry capacity and a challenging cost profile we recommend investors avoid ethanol stocks in the near term. Today’s WASDE release reported better-than-expected weather, lower-than-anticipated corn crop loses from the Midwest flood and a higher-than-anticipated corn yield. We think that investors have already priced this news into ethanol valuations over the past two weeks and there are likely few positive catalysts in the near future."

With a base case price target of $11, implying almost 40% of upside, and a bull case price target of $18, implying 125% of upside, Morgan Stanley sounds pretty bearish on the company they brought public in 2006.

The stock closed up $.41 or 5.3% to $7.56.