Renewable Energy Group Inc
We’ve covered several bargain stocks from climate-unfriendly industries
such as coal and oil. This stock is from the opposite end of the spectrum.
Renewable Energy Group (REG) is the largest manufacturer of biomass-based
diesel (biodiesel) in North America. Biodiesel is used primarily as
transportation fuel and reduces carbon emissions. It has capacity to
manufacture 505mn gallons of product annually.
REG is highly dependent on government regulation for its economics. The
cost of manufacturing biodiesel is higher than petroleum-based products. The
attractiveness of the product lies in regulation requiring petroleum refiners
and importers to purchase mandatory quantities of biodiesel, which earns them
renewable identification number (RIN) credits. Each gallon of biodiesel
generates 1.5-1.7 RINs. However, no purchase obligations have been set for 2023 and beyond when
it’ll be under the discretion of the EPA.
The company is also dependent on biodiesel excise mixture tax credits
(BTC) - incorporated in increased sales prices. These BTCs seem to be intermittently
reinstated by the government, sometimes retroactively. The most recent
implementation was in December 2019 and applied retroactively for 2019, 2018,
and 2017. This added a $261m benefit to adjusted ebitda for 2019.
Finished goods are dependent on gasoline/petroleum demand and prices - as
it drives purchases of biodiesel to comply with regulations. Low gasoline prices
today don’t bode well for biodiesel prospects.
REG uses a wide variety of low-cost feedstock, which compares favorably
to soybean used by competitors. However, these favorable spreads fluctuate
widely based on the commodities’ economic factors.
The company is also exposed to large competitors installing capacity for
the newer renewable diesel product, which is more profitable and appears to
perform favorably compared to biodiesel.
REG generated $2.6bn in sales and $280mn in ‘adjusted’ ebitda in the
last twelve months that adjusts for the timing of the BTCs. Net debt amounted
to $92mn and appears minimal.
The company doesn’t pay dividends and it has repurchased a small amount
of stock in the past with $142mn of firepower left from various board repurchase
authorisations.
The equity sells for $947mn resulting in an enterprise value of $1.04bn
and a trading multiple of 3.7x ebitda.
For a company that’s so dependent on government regulation, and not-so-favorable
economics, this doesn’t appear to be a screaming buy even under favorable 2019
earnings when compared to other stocks we’ve covered. Investors may be better
off taking a pass on this one at the current price.