Natural gas for transportation leader Clean Energy Fuels Corp (NASDAQ:CLNE) has steadily grown and improved the quality of its business and business results over the past several years. Today's Clean Energy Fuels is leaner, has a stronger balance sheet, and is in a solid position as a market leader in a growth industry.
But is the stock undervalued? By one metric, book value per share, it looks downright cheap. But management used a massive amount of stock to make ends meet over the past 18 months, destroying a significant amount of shareholder value in the process. Still, the loss of an important tax credit will have multimillion-dollar implications, and the sale of a very profitable part of the business raises questions about the company's ability to generate positive cash flows this year.
In short, the answer is a little more nuanced, but there's a distinct possibility Clean Energy's stock is very cheap right now.
By this metric, Clean Energy is cheap
On a book value basis, Clean Energy Fuels is definitely undervalued:
What exactly does this mean? In short, at its current price, Clean Energy's stock sells for a 22% discount to the book value of the company's assets.
But that alone doesn't make a company cheap. A number of factors can affect book value and book value per share. For instance, Clean Energy management has sold a lot of stock at rock-bottom prices to improve the balance sheet and reduce debt:
And while this was a necessary action since the company had more debt maturing in 2016 than it would have been able to pay off without significantly depleting its cash reserves, it played a major role in driving down Clean Energy's share price and book value multiple. This has eroded a lot of the market's faith in management's ability to create per-share value.
This lack of confidence was compounded in late 2016, when the company announced that it had expanded its "at the market" program, which allows for the sale of even more stock, and at a time when the stock is trading at what appears to be deeply undervalued levels.
Furthermore, book value multiples only tell part of the story. Measuring Clean Energy's ability to generate profits and positive cash flows is just as important.
Understanding earnings versus cash flows
On a GAAP basis, Clean Energy Fuels hasn't been profitable since 2011:
A big reason for this is tied to the company's capital spending spree, starting in 2012:
The company spent hundreds of millions of dollars between 2012 and 2015 on capital expenditures, the vast majority of it on new natural gas refueling station assets.
All of those new assets now "cost" $60 million per year in depreciation and amortization expenses. It's a major contributor to the company's GAAP losses, but it's not a cash expense -- it's actually a benefit, at least when it comes to cash-flow generation. By depreciating these assets, the company is able to reduce its tax expenses. Yes, eventually it will have to spend money to replace those assets, but management says they will long outlive their depreciation value, and for the time being, this "negative" to the GAAP profit line is a positive to cash flows.
The company has made significant progress on a cash-flow basis:
There are four main reasons cash flow has improved:
- Fuel volume sales growth
- Improving its operating structure and lowering expenses
- Debt reduction.
- Capital expenditures reduction
The debt reduction came at the cost of major shareholder dilution, but it's another step forward for positive cash flows. A recent asset sale raised another $150 million in cash, which management says it will use to further lower debt. Combined, Clean Energy Fuels could see interest expense fall as much as $20 million in 2017.
The bad news with cash flows (and how it may not be that bad)
Two things will have a negative impact on the company's cash flows in 2017. The first is the loss of VETC, or volumetric excise tax credit, which expired at year-end and was worth $26.6 million to Clean Energy in 2016. And while there's a decent chance it will be renewed -- it's part of the "tax-extenders" and will likely be part of a bigger tax policy bill at some point -- as of this writing, it's gone and can't be counted on.
Second is the impact of the asset sale mentioned above, which will negatively affect margins and revenue his year. According to a pro-forma operating statement Clean Energy released recently, the company would have generated $29 million less revenue, and reported a net loss of $27 million.
From a cash-flow perspective, the combined impact isn't quite as bad. Adjusting for depreciation/amortization expense and the loss of VETC, Clean Energy would still have generated $2.5 million in positive cash flows. Add in the interest expense savings, and the company is set to generate more than $20 million in positive cash flows in 2017, even if fuel sales don't increase (which is unlikely).
There's potential value (if management doesn't screw it up)
I think it's reasonable to conclude that Clean Energy Fuels is a good value, and maybe even dirt-cheap. It's a growing, cash-flow positive business with a strong balance sheet and an asset base that can support substantial growth without major new capital requirements. And it's selling for less than the value of its assets.
The caveat is whether or not management decides to sell more stock. At this point, the company should have more than enough cash on its balance sheet to both further pay down debt and maintain a margin of safety without selling a single share. The uncertainty around whether it happens or not, frankly, is the only thing that keeps Clean Energy from being an absolute bargain right now.