Congress Just Handed This Company a $205 Million Windfall. Is Its Stock a Buy?

One dollar per gallon here, and one dollar per gallon there can really add up in the 2.5-billion-gallon biodiesel industry. That's because the Biodiesel Mixture Excise Tax Credit (BTC) provides a $1 per gallon subsidy to the first company that blends biomass-based diesel with petroleum-based fuel, which is usually the company that produced the biodiesel. Er, that's how it's supposed to work, anyway, but the subsidy has become a bit of a budgeting and political football for Uncle Sam, as evidenced by its being allowed to expire in 2010, 2012, 2014, 2015, and 2017. 

The bad news is, the tax-credit reversals have resulted in a healthy dose of uncertainty for the renewable fuel industry. The good news is, the BTC has been retroactively reinstated every time it's been allowed to expire. The awesome news: A continued focus on long-term growth has made that more valuable to Renewable Energy Group (REGI) each time.

Case in point: After Congress retroactively reinstated the 2017 BTC on Feb. 9, the nation's largest biodiesel producer learned it would collect a cool $205 million windfall. Does that make Renewable Energy Group stock a buy? 

Image source: Getty Images.

By the numbers

Renewable Energy Group turned in record production and sales volumes in 2017. That included 416 million gallons of domestic biomass-based diesel production, or about 17% of America's total output. The company also strategically purchased renewable fuels produced by third parties, as well as petroleum-based fuels, and produced 38 million gallons in Europe. In all, it sold an annual record 587 million gallons of fuels last year, compared to just 375 million gallons in 2015. 

That fueled the company's massive windfall from the reinstatement of the BTC. The benefit will be recorded in the first quarter of 2018. Nonetheless, when reporting full-year 2017 results, the company presented adjusted operating metrics that account for the subsidy. Since operating results from 2016 include the BTC, the adjusted financials offer more of an apples-to-apples comparison. 

Data source: Company press release.

The $286 million swing from net income to adjusted net income includes a $205 million benefit from the reinstatement of the BTC, which goes to show just how important the subsidy is for biodiesel producers. While Renewable Energy Group has made strategic investments over the years that allow its production fleet to manufacture renewable fuels on a wide range of feedstocks -- so as to take advantage of market conditions, reduce costs, and increase operating flexibility -- the BTC is still what ultimately makes or breaks the company's financial performance.

That alone might keep some investors away from the stock. But considering the credit has been "in place" since becoming law in 2005 (including retroactive reinstatements, of course), some investors might want to take a closer look.

Despite the 23% surge since Congress announced a reinstatement of the BTC, shares of Renewable Energy Group are still undervalued. Does that make the stock a buy right now? 

Data source: Yahoo! Finance.

Well, the company's current market valuation of $525 million is still shy of its $568 million book value, although the company has historically traded well below book value. That's likely due to the near perennial uncertainty of the BTC -- and there won't be any relief in the near term.

While Congress retroactively reinstated the credit for 2017, it didn't make a decision for any future period. In other words, the BTC is currently inactive for 2018, and Renewable Energy Group will be operating without its generous benefit until it's retroactively reinstated -- if it is at all.

Endure the volatility or stay on the sidelines?

This is an intriguing renewable fuels stock. On one hand, Renewable Energy Group is a well-managed global leader in an industry with staying power. When the BTC is in place, the business turns in healthy profits. On the other hand, the fate of the business is still tied to the all-important BTC. While the credit has been reinstated 100% of the time it's been allowed to expire, there's no guarantee that will always be the case. Worse, it would need to grow production volumes to near impossible levels to have any shot of being profitable without the credit.

If there was more long-term certainty surrounding the BTC (such as Congress enforcing it for a five-year period), then this might be a relatively solid stock to buy. But without that, Renewable Energy Group just hasn't been able to deliver consistent returns to shareholders despite consistent growth and expansion. For now, and especially after the stock's 23% rise in recent weeks, investors should pass on this biodiesel leader.