There's a renewable energy stock you probably haven't been paying attention to, but the financials of the underlying business present a solid argument for taking a closer look.

Last year, it delivered revenue of $2.1 billion and grew the volume of products sold 127% compared to 2013. At the end of the first quarter of 2018, it boasted a book value of $20.80 per share, but shares are trading hands at just over $17 apiece right now -- and that's after they rose 52% year to date. That means there's still a 15% premium between the current stock price and fair book value.

However, there could be quite a bit more long-term growth ahead of the business. That's true considering its historical slow-and-steady expansion, but also when investors factor in a recent proposal from the U.S. Environmental Protection Agency that would increase the company's U.S. market opportunity 16% beginning in 2020. A global shipping fuel standard that goes into effect then should provide an even bigger growth opportunity. Those are just some of the reasons investors might want to get familiar with Renewable Energy Group (NASDAQ:REGI).

A hand held out, extending from an arm covered by a suit-jacket sleeve, and various renewable energy icons floating over the hand.

Image source: Getty Images.

The business

In 2017, Renewable Energy Group sold 503 million gallons of renewable fuels, approximately 20% of all biomass-based diesel fuel sales in the United States. Meanwhile, a focus on expanding its national terminal and distribution network allowed it to increase sales of petroleum-based fuels to 83 million gallons last year, which represented year-over-year growth of 54% and provides an important avenue for it to diversify revenue. The company also boasted a diverse customer mix, with 36% of sales going to retail customers, 34% to oil majors, and 20% to distributors. 

That level of production and diversification makes it possible for investors to entertain the possibility of profitable operations with or without the all-important federal tax subsidy called the Biodiesel Mixture Excise Tax Credit (BTC). The BTC provides $1 per gallon of biodiesel to the first company that blends it with petroleum-based fuels. That's usually the biodiesel producer. And thanks to Renewable Energy Group's impressive output, the tax credit can deliver healthy profits -- when the credit is active.

Unfortunately, that's usually a problem. Congress has allowed the federal subsidy to expire in 2010, 2012, 2014, 2015, 2017, and 2018. While the BTC has been retroactively reinstated each time (it's still not in place for 2018), Wall Street has kept shares of the renewable fuels leader chronically undervalued due to the constant uncertainty.

A field of oil rapeseed.

Image source: Getty Images.

For instance, Renewable Energy Group reported a net loss of $79 million in 2017 without any help from the BTC. But that included a one-time $50 million asset impairment charge for a biodiesel facility that never finished construction. It also excludes the $205 million windfall received from the retroactive reinstatement of the 2017 BTC earlier this year, which was recorded in the first quarter of 2018. Squint your eyes so the tax credit shows up in 2017 financial statements -- the year the fuel attached to it was actually produced -- and the business would have reported $230 million in adjusted EBITDA last year.

Soon enough, the status of the BTC may not matter in determining whether or not the business posts a profit, but rather how high a profit it posts.

The growth strategy

Renewable Energy Group is positioning itself to achieve profitable growth with or without federal tax credits. The strategy includes constantly introducing new technologies at biodiesel manufacturing sites to lower production costs, expanding its high-margin renewable diesel footprint, and growing its distribution network to provide opportunities to sell petroleum-based fuels, too. The company has a track record of making investments with high return on invested capital, and the current capital projects are no different. 


Planned Upgrades for Biodiesel Facilities

Planned Upgrades for Renewable Diesel Facility

Capital expenditures, total

$60 million to $65 million

$100 million to $110 million

Estimated incremental production, annual

30 million to 40 million gallons

35 million to 45 million gallons

Estimated incremental adjusted EBITDA, annual

$30 million to $35 million

$30 million to $35 million

Data source: Renewable Energy Group investor presentation.

If the planned upgrades deliver on-budget and incremental production of fuel and profits, then Renewable Energy Group will be well on its way to achieving profitable operations without the BTC. That doesn't even include the continued expansion of petroleum-based fuel sales, or two important catalysts that will arrive in 2020.

First, the U.S. EPA has proposed increasing the amount of biomass-based diesel that must be blended into the nation's supply of transportation fuels, from 2.1 billion gallons in both 2018 and 2019 to 2.43 billion gallons in 2020. That would mark a 16% increase from this year's levels and a 49% increase from 2014 obligations. That could increase selling prices or tip the company's hand in investment decisions, either regarding new acquisitions or restarting construction at uncompleted production facilities. 

Second, the International Maritime Organization (IMO), which sets marine standards for over 170 countries, recently decided to reduce sulfur content in marine fuels from 3.5% to 0.5% beginning in 2020. Considering that marine fuels are a 4 million-barrel-per-day market, the change is expected to result in a step-wise increase in demand for cleaner-burning distillate fuels such as diesel and, therefore, biomass-based diesel. Some estimates predict that global annual diesel consumption will grow by 25 billion gallons when the new sulfur limits are implemented.  

A man refueling a car.

Image source: Getty Images.

More room to run, but can it outrun uncertainty?

Renewable Energy Group's biodiesel and renewable diesel operations might not be as sexy as solar panels or wind turbines, but Wall Street is finally warming up to their growth potential. The company has quietly delivered growth and executed on its long-term strategy year after year. That has positioned the company to be oh-so-close to achieving profitable operations with or without the BTC.

If the company can achieve the expected incremental adjusted EBITDA growth from new projects in the next year or so, then it could be ready to capitalize on the two huge catalysts expected to come into force in 2020. And if the BTC remains in place, even retroactively, then Renewable Energy Group shares could be poised to continue their run. That's why I think investors should at the very least keep an eye on this renewable energy stock.