Why Can't This Top Biofuels Stock Gain Investors' Respect?

The nation's largest biodiesel producer is investing in future growth projects but still cannot shake short-term worries.

Aug 7, 2014 at 11:35AM

Equity investors search far and wide for consistent growth, profits, and the ability to capture larger gains in the future. Renewable Energy Group (NASDAQ: REGI) delivered all three (again) in the second quarter of 2014, but it's still being disrespected by investors. The largest biodiesel producer in the United States continued its steady expansion and pushed past the $1 billion watermark for total assets on the heels of two important acquisitions: the Fischer-Tropsch company Syntroleum and Tyson Foods' 50% interest in a renewable diesel facility.

More important than growth in assets, which were largely offset by increased debt, net book value leapt to a record $673 million. Despite the progress, Renewable Energy Group trades at a market valuation of just $500 million -- a steep discount to book value -- while shares have been whacked 24% in the last year.

REGI Chart

REGI data by YCharts
*Share count has actually increased by 9.1% to 42.31 million.

What gives? Most of the disrespect comes from the continued uncertainty regarding the nation's Renewable Fuel Standard, or RFS, which dramatically lowers margins for biodiesel producers by removing key subsidies such as the Blender's Tax Credit, or BTC. But some of the disrespect can also be chalked up to a misunderstanding about the company's business -- something management attempted to clear up on the last conference call.

Mr. Market is distracted by biodiesel business
Even with substantial growth projects in the pipeline (discussed in next section), Renewable Energy Group will remain largely dependent on first-generation biodiesel production for total revenue. The good news is that a focus on diversifying feedstock capabilities across its fleet of biorefineries in recent years has resulted in unparalleled operating efficiency. That compounds the profit potential when subsidies are active and allows the company to at least break even when subsidies are caught up in political battles. The latter is the bad news.

Consider the differences between the first half of 2013 (with BTC) and the same period this year (without BTC):

 

1H14

1H13

% Change

Gallons Sold

124.4 million

108.1 million

15.1%

Average Selling Price

$3.62 per gallon

$4.59 per gallon

(21.1%)

Total Revenues

$552.0 million

$649.1 million

(15%

Adjusted EBITDA

$7.63 million

$63.82 million

(88.1%)

EBITDA Margin

1.38%

9.83%

(86%)

Source: Renewable Energy Group

While breaking even in such volatile market conditions is something many biodiesel producers can only dream of, the biodiesel market doesn't instill much confidence in investors, who would rather steer clear of biofuels stocks. And that's exactly why Renewable Energy Group is working hard to diversify its business.

Increasingly complex and diverse business
Renewable Energy Group may be the largest biodiesel producer in the country -- and will remain heavily dependent on the market -- but its business is no longer simplified by first generation biofuels alone. By the end of 2014 the company will have sold biodiesel, green heating oil (qualifies for state subsidies independent of BTC), renewable diesel (a second generation biofuel that qualifies for higher subsidies than biodiesel), and small quantities of other industrial intermediate chemicals, such as naphtha and propane.

G

Source: Renewable Energy Group

In the next several years, investors will have to keep track of specialty chemical sales such as flavors, fragrances, lubricants, polymers, and more from the company's synthetic biology-powered industrial biotech platform. Throw in wildcards such as international business expansion and feedstock distribution and the business gets even more difficult to predict. It's obvious that the uncertainty of the biodiesel market and unpredictability of future growth spooks investors and analysts away from the business, although I see that as an exploitable opportunity for investors.

Do you respect future growth?
Renewable Energy Group expects its biodiesel business to report an adjusted EBITDA between breakeven and $20 million in the second half of 2014 assuming the BTC isn't reinstated. Unfortunately, investments in renewable diesel (REG Synthetic Fuels from Syntroleum and Tyson Foods acquisitions), renewable chemicals (REG Life Sciences from LS9 acquisition), and energy services will drag total adjusted EBITDA to between -$30 million and breakeven.

That's scary for the short term, especially considering that the value created from developing those businesses will take several years to make a meaningful impact on the business. But I think investors should view the growth in the pipeline not as a chaotic disruption to the business, but as a move toward valuable diversification. Mr. Market doesn't respect future growth for the biodiesel leader -- will you exploit his nearsightedness?

Maxx Chatsko owns shares of Renewable Energy Group. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers