Tuesday, March 26, 2013

Biodiesel Producer Shakes Dependence on Subsidies

Earlier this month biodiesel producer Renewable Energy Group, Inc. (REGI:  Nasdaq) reported a tidy profit of $22.3 million on record $1.0 billion in total sales.  Reported net income was $43.5 million, including accounting treatments for corporate recapitalization undertaken in the year.  Results from 2012 were noteworthy on a couple of counts. 

It was the first time in the company’s ten-history (including years of operation among predecessor firms) that sales exceeded $1.0 billion.  REGI produced 188 million gallons of biodiesel from a variety of feedstock, including non-edible corn oil, used cooking oil, animal fats and soybeans.  Feedstock flexibility has helped drive down direct costs.  Gross margin in 2012 skyrocketed to 14.8% compared to 7.4% in 2012 and 4.3% in 2010. 

Renewable Energy Group Houston Plant
The company’s profits also exceeded government subsidies for biodiesel production, providing a strong endorsement of REGI’s low-cost business model.  Even without the $8.3 million in total government biodiesel subsidies received in 2012, REGI would have reported a profit.  Granted, the company’s predecessor firms on a combined basis achieved this “profit” status twice before in 2005 and 2007.

In my view, the two achievements demonstrate that with scale, renewable fuel producers can turn a profit and deliver value to shareholders.  REGI is dependent upon a supplier network for feedstock.  However, like the squeaky wheel, a large buyer gets attention and probably the best the market has to offer.  Management has made a point of how well-tuned their feedstock buyers are to drum beat of daily supply and pricing.  That certainly helps get the low-priced feedstock REGI needs.

The four analysts with published estimates for REGI seem to think the company can maintain production and sales in 2013, but real top-line growth is not expected until next year.  The consensus estimate for 2013 is $1.43 on $1.1 billion in total sales.  That means REGI shares are trading at 5.2 times the current year earnings estimate.  That seems like a bargain to me for a company with a ten-year production history, growth prospects and profits.

There has been building momentum in REGI shares since last fall and the stock has nearly doubled.  However, every month or so, the stock takes a breather, providing value-oriented investors to nibble away a few shares are interesting prices.  A long-term price objective near $12 or $13 is not unreasonable.

 
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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