The Value in Trends© (NYSE:VIT) system uses a quantitative approach to screen for value. Then, the trend direction, momentum and condition is analyzed to determine investment entry/exit points. The ViT system produces an efficient overview of the fundamentals and technicals of a company, paving the way for further extensive research into economic conditions, industry dynamics and company specifics.
In its Q1 FY14 financial results, Renewable Energy Group (NASDAQ:REGI) revealed revenues came in at $219.0 million, 23% higher than the consensus estimate of $177.5 million but a 17% decrease compared with Q1 2013. Meanwhile, the net loss attributable to common stockholders was $2.0 million, or ($0.06) per share on a fully diluted basis. This compares to net income of $38.4 million, or $1.25 per share on a fully diluted basis in Q1 2013. Consensus estimates had suggested a loss of only $0.04.
Analysts have been downgrading their earnings expectations since the results announcement on sixth of May, whereas sales are expected to hold up. In 2014, earnings of $3.5 million are expected off sales of $1.04 billion, equating to an EPS of $0.83. In 2015, earnings of $36.4 million will be generated off sales of $1.13 billion, giving an adjusted EPS of $0.90.
With the share price at $11.47 as of the end of June, the FY15 EPS estimate has the company trading on a forward P/E of 14.2x but then reducing to 9.3x in 2016. Although that's not as cheap as what the current P/E level suggests, it is still okay. Elsewhere, the forward valuation multiples continue to look attractive, despite the negative forecasts of the analysts. FY15 and FY16 Price/Sales are only 0.4x and 0.3x, respectively. The forecasts for Price/Cash Flow over the same period are 7.4x and 6.7x, respectively.
Quantitative Value Analysis
I define value as the combination of an attractive price and quality factors. Quality can be further broken down into profitability, health and efficiency.
(NYSE:I) Relative Price
To examine price, I use the conventional approach of analyzing price multiples. I rank these into deciles with one indicating the cheapest 10% and 10 indicating the most expensive 10% of companies based on that specific multiple.
Then, I backtest the performance of each of these deciles going back over the past 14 years (end December 1999 to end December 2013) to determine whether the company is attractively positioned based on the historical returns. I conducted my tests across the Russell 3000 index.
- Renewable Energy Group's EV/EBITDA of 2.8x ranks it in the first decile. Companies in this decile have produced the highest annualized returns of 15.1% from 2001 to 2013.
- The company is also ranked in the first decile in terms of P/E, with a ratio of only 3.2x. This has been the best performing decile, producing an annualized return of 16.0%.
- On a P/S basis, the company also appeals with a ratio of a mere 0.3x. This positions the group in the first decile, where the annualized return for companies historically is 19.3%.
- With a P/CF ratio of just 1.7x, REGI looks cheap too. It is ranked in the first decile, where companies have historically produced an annualized return of 17.5%.
- The company trades for less than its book value, with a P/B ratio of 0.7x, ranking it amongst the cheapest 10% of companies. This has also been the best-performing decile over the 14 years of data tested, producing an annualized return of 16.5%.
For quality purposes, I first analyze profitability and break down the calculation of Return on Equity through DuPont analysis. The resulting figure for Asset Turnover then measures efficiency while the reading for Leverage is an indication of health. Combined with profit margins, this gives a good overview of company quality.
Once again, I rank the components into deciles from 1-10. Then, I backtest the performance of each of these deciles on the Russell 3000 going back over the past 14 years to determine whether the company is attractively positioned based on the historical returns.
- REGI has an ROE of 24.8%, ranking it in the second decile. Companies in this bracket were the fifth best performing, producing an annualized return of 7.0%.
- The company has a negative 1.1% profit margin and is ranked in the eight decile. Hence the reason for the cheap valuations. However, here is the compelling thing. Companies in this decile have actually been the best performing, producing annualized returns of 10.8%.
- A/T is impressive at 1.9x. This ranks it the top decile across the Russell 3000, which has also been the best performing over the 14 years, producing an annualized return of 11.2%.
- The leverage reading is 1.2x. That ranks REGI amongst the 10% lowest leveraged companies in the Russell 3000. However, this decile has actually been the worst performer over the period tested, producing annualized returns of a mere 0.8%.
Technical Trend Analysis
I break down the examination of a company's trend into three components:
- Direction of the trend,
- Momentum of the trend, and;
- Condition of the trend.
- REGI's share price has been trading below its 200-day moving average (MA) since 18th November 2013, when a note from a Stifel analyst sent the share price plunging, highlighting regulatory concerns. The company is trading around these same levels still today. However, having risen almost 18% in the month of June to $11.47, the share price now has support at the 50 and 100-week MAs. These levels are currently at $10.81 and $11.15, respectively. The next target looks like being the 200-day MA resistance at $11.71.
- Momentum has been advancing steadily since mid/late May and broke into positive territory in mid-June on the daily chart. On the weekly chart, the momentum has also been picking up since what seems to have been the bottom in February 2014. However, it is still in negative territory.
- The key levels to look out for on the RSI chart are 70 and above, which equate to an overbought condition. Meanwhile, a reading of 30 or below reflects an oversold condition. The daily RSI for the company is 64, which is neutral but nearer to overbought. However, on the weekly chart, the RSI is 53 indicating there is plenty of room for the condition to rise further.
Applying the quantitative fundamental evaluation to Renewable Energy Group, the appeal is obvious. The company is ranked amongst the cheapest 10% of companies in the Russell 3000 index across each of the EV/EBITDA, P/E, P/S, P/CF and P/B multiples.
Even before investigating the industry and regulatory issues further, the quantitative quality analysis soon reveals why the company trades at such low multiples. The company is not generating a profit and recent earnings have disappointed. Its profit margin has it in the 8th decile of the Russell 3000. Wall Street is almost always too pessimistic in their evaluation of low profit margin companies. However, the evidence over the past 14 years suggests that these companies actually have a good record of producing good returns. With the company also ranked in the top decile in terms of Asset Turnover, the case for REGI grows stronger.
With regards to the trend, the recent break above the 50 and 100-day MA is encouraging. However, I think the key are could now be the 200-day MA at $11.71. If the share price can take out this level, I would expect to see a renewed boost in momentum.
To sum up, the ViT overview paints the picture of a company with disappointing margins but that this has already been considerably priced in. The next step for investors would be to investigate the regulatory issues in the industry and dig deeper to determine the longer-term prospects for REGI.
From a trader's perspective, I would wait for a confirmed break above the 200-day MA. This event would signal an attractive entry point in my opinion. I would also initiate a stop loss in place below the 50-day MA at $10.81.
Disclosure: I am/we are long REGI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.