Take a SWOT at Renewable Energy Group
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is easy to get overwhelmed by a sea of information when researching a potential investment. What is noise? What really matters to the long term prospects for an investment? Remember, when you buy shares in a company you own a piece of that company – not just a three to five-letter ticker on the other end of your login page. A great way to organize your research is to perform a SWOT analysis. Today we take a look at biodiesel leader Renewable Energy Group (NASDAQ: REGI).
- Multi-feedstock capacity. Soy oil is the dominant feedstock (70%) for biodiesel production, but it is also expensive. The company is renovating a substantial portion of its current 212 mmgy capacity into multi-feedstock facilities, while all facilities under construction (150 mmgy) are multi-feedstock. That will enable REG to take advantage of market volatility or lower cost feedstocks, such as yellow grease.
- The Big Boy. When 2012 is in the books REG will have produced 15-17% of the nation’s total biodiesel production. Its planned 362 mmgy capacity by the end of 2013 would be enough to supply 1 out of every 4 gallons of biodiesel the country needs in 2014.
- The Veteran. The company has been in biodiesel for more than 15 years, which goes a long way in an industry full of rookie hopefuls.
- The Terminal-ator. Once you produce biodiesel you need a reliable way to get it into customer hands. REG is building one of the nation’s premier biodiesel distribution networks with terminals in important transportation hubs such as Ohio, Texas, and California.
- Hedging volatility. Despite increasing YOY production 40% in 3Q12 REG suffered an unexpected loss after attempting to hedge renewable identification numbers (RIN). The company overbought its volume obligation when RINs hit a “stable, all-time” low of $1.50 in June. That backfired when RINs fell to just $0.50 in October.
- RFS2 increases not enough. Production of biodiesel has outpaced government mandates nearly every month for the past 3 years. Even though investors cheered the newly approved 2013 requirement that calls for 1.2 billion gallons of biodiesel, national capacity as of September 1 was 2.1 billion gallons. If RFS2 increased by the historical 200 million gallons per year then the industry wouldn’t need new capacity until 2017 (excluding exports).
- Biofuels stench. No matter how healthy the company’s balance sheet becomes investors just can’t remove REG from the biofuels umbrella. The recent mistake in hedging RINs allows investors to categorize the company as an unprofitable and wishful thinking business.
- Steady RFS2 increases. The biodiesel industry is well ahead of government blending and capacity requirements (more than double the capacity needed, actually). That will translate into RFS2 increases of at least 200 million gallons every year for the foreseeable future. Will it be enough?
- Falling government incentives. You may not think this helps biodiesel producers if you read the headlines, but as it turns out this is one of the company’s biggest opportunities. In 3Q11 government incentives made up 9.62% of revenue. That number fell dramatically to just 0.58% in 3Q12. Many smaller producers can’t compete without the incentives, which leads to…
- Industry consolidation. Being an established player has its perks. REG is constantly acquiring facilities at liquidation prices from producers in financial trouble. It recently purchased a 15 mmgy multi-feedstock facility in Texas for just $300,000 in cash and 900,000 shares – or about $4.8 million.
- Constant oversupply. The 1 billion gallon blending mandate for 2011 was reached in September. Oversupply lowers RIN values and forces producers to idle facilities – hurting revenues.
- Increasing American efficiency. Passenger vehicles aren’t the only ones being held to higher efficiency standards. New mandates passed in 2011 require semi-trucks to reduce fuel consumption 20 percent by 2018. Combine that with oversupply and demand for diesel could be significantly reduced.
- Feedstock volatility. While having multi-feedstock capability is an advantage, it won’t mean much if all feedstocks increase in price. Yellow grease, long considered a lower cost alternative, has enjoyed quite a ride this year.
- Low barriers to entry. Anyone can make biodiesel. It helps that REG is established, but rivals are always lurking.
Foolish bottom line
Renewable Energy Group is at the top of my watchlist. At $5 per share the company is trading at a significant discount to shareholders’ equity, which represents a book value of $11.37 per share (a 127% premium to current prices). Debt has fallen dramatically while cash and assets have risen – an incredible find for a high-growth company. Most sustainable chemical companies trade above book value, so I consider REG a gift to investors. It will take a few consecutive quarters of profits to turn some heads, but that won’t be difficult to achieve after increasing production capacity by 72% by the end of 2013.
Unlike Amryis (NASDAQ: AMRS) or Solazyme (NASDAQ: SZYM), which are struggling to maintain investor interest between now and full commercial scale, REG has nothing to prove in terms of novelty for a biotechnology platform. That’s because there is nothing novel about transesterfication. Amyris has little to show (less than 265,000 gallons of farnesene per quarter) for hundreds of millions in investments. While Solazyme has fared much better in terms of courting partners to take on costs and is, as of this writing, on target to reach its scale-up goals, investors won't reap the benefits until 2014 or 2015. Luckily, biodiesel production doesn’t require large cash infusions to achieve steady production increases.
That’s fine with me. Sometimes the best investments are the ones with the simplest business models.
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