3 Reasons To Like Renewable Energy Group

Aug.11.14 | About: Renewable Energy (REGI)

Summary

Renewable Energy Group, Inc. has seen a rapid expansion through acquisitions.

The company has diversified its portfolio for growth opportunities.

The company has operationally endured despite declining government incentives.

Renewable Energy Group, Inc. (NASDAQ:REGI) is a leading producer and seller of advanced biofuels and renewable chemicals in the United States. The company has quickly grown in a relatively short amount of time amidst a generally negative investor sentiment towards biofuel companies. REGI has operated upon the principle that biofuels can be a sustainable and profitable business once operations can function on a large scale. To date, it has become one of the most aggressive and successful companies in the industry to expand across the nation.

(Source Link)Click to enlarge

The following are three reasons to like REGI now:

  1. Rapid Expansion Through Acquisitions. From December 2013 to June 2014, REGI grew its total assets from $740.86 million to $1.07 billion. REGI only had $484.45 million and $495.78 million in total assets for the years ending in 2011 and 2012 respectively. This rapid growth is in response to becoming a public company and having an increased access to capital. The company has managed to take advantage of soft market conditions in order to accumulate undervalued facilities. By consolidating these assets, the company has been able to increase production and further strengthen its distribution reach across the nation.
  2. Diversifying Growth Opportunities. While REGI has been expanding its asset footprint, the company has also been developing additional long-term revenue channels to diversify its market potential. The recent acquisitions of Syntroleum and LS9 were instrumental to strengthening its long-term outlook. Not only does the Syntroleum acquisition grow the company's manufacturing capacity but it also expands the company's reach into gas-to-liquids technology and renewable diesel. Likewise, the LS9 acquisition gives REGI an opportunity to expand into industrial biotechnology and into bio-based chemicals in particular.
  3. Steady Operations Despite Reduced Government Incentives. For the quarter ending in June 2013, REGI reported biodiesel government incentives of $44.58 million. For the quarter ending in June 2014, this amount had fallen to $5.02 million. Despite this decline, the company was able to record a quarterly net income of $11 million off of $332.92 million in revenue. While much of this gain was a result of an income tax benefit, the company only incurred a small loss from operations of $0.48 million. As REGI consolidates and expands upon its latest acquisitions the company should be able to increase its profitability through efficiency gains and the further development of higher margin technologies. The fact that the company hasn't seen more drastic declines with these reduced levels of government incentives remains a positive indicator looking forward.

A Look At The Company Now

As of the closing price of $11.65 on August 8, REGI now trades with a market capitalization of $493 million. As of June 30, the company supported total assets of $1.07 billion, of which total liabilities amounted to $395.44 million and shareholders' equity stood at $673.65 million. With current assets of $284.78 million and current liabilities of $97.19 million, REGI maintains a healthy current ratio of approximately 2.93.

From the perspective of earnings, the company has seen increasing product growth at the expense of a declining bottom line. For the six months ending in June 2013, REGI brought in total revenue of $649.1 million with a net income of $69.53 million. For the same six months in 2014, REGI brought in total revenue of $551.87 million with a net income of $8.65 million.

Biodiesel sales grew from $529.37 million to $536.96 million for the 6-months in 2013 and 2014 respectively. Yet biodiesel government incentives fell from $119.65 million to $14.91 million over the same time period. The gross profit margin for the quarter ending in June was 13.04% and 4.55% for the years 2013 and 2014 respectively. The largest part of the decline was due to the declining government incentives.

My Take On Renewable Energy Group

The primary challenge of renewable fuels today is the heavy upfront cost of capital needed to achieve the scale necessary for improved economies of scale. When it comes to acquiring such costly infrastructure, REGI appears to be a leading name in the industry. The company has consolidated a large number of facilities, which utilize several low-cost feedstocks. It's also developed the ability to distribute product across the nation.

Investors need to understand that REGI doesn't necessarily have to maintain a rapid state of accelerated growth in order to succeed. For now, the company only needs to stay afloat while it utilizes its cash flows in order to develop its existing business and improve upon its next generation technologies. This is especially the case considering the wide market opportunity the company can address. As such, the company would be a strong buy even if it were fairly priced in the present.

(Source Link)Click to enlarge

Yet for both short-term traders and long-term investors, REGI now stands discounted to its fair value. At its current market capitalization, the company trades at a mere 73% of its shareholders' equity. This is despite the fact that the company has maintained a slim positive income amidst a difficult market for biofuels.

On the upside, investors should be aware that there remains the near-term possibility of increased government incentives. At the same time, REGI will continue to develop its acquired technologies, which can dramatically improve the company's margins. Additionally, the company's increase in manufacturing capacity should further increase revenue growth looking forward.

I believe that Renewable Energy Group, Inc. remains one of the most promising plays in the green energy space today. The company is domestically located and removed from the political risks found abroad. As a biofuel company, its core strength lies in its numerous facilities capable of significant production volumes.

While the company may be struggling to maintain a profit in the present, it now has the pieces necessary to improve margins over the long term. This can be done apart from a reliance on government incentives while also not being excluded from them. Above all, the company continues to trade below book value amidst a poor investor sentiment surrounding the industry as a whole.

Disclosure: The author is long REGI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.