(By Rich Bieglmeier) Learning about unfamiliar companies and technologies as a result of our weekly accumulation/distribution spreadsheet is one of iStock's favorite benefits of the task. It was a joy reading and learning about Renewable Energy Group, Inc.
) and its biodiesel business. Last week, REGI ranked eighth on our leaderboard with Wall Street pumping more than 1% of the company's market cap into its treasure chest.
Renewable Energy Group is the largest producer of biodiesel in the United States. Since 1996, the clean-energy company has transitioned from an operator of a network of mostly third party-owned facilities to owning six operating biodiesel production facilities with aggregate nameplate production capacity of 212 million gallons per year (mmgy).
The company is benefiting from the EPA's Renewable Fuel Standard (RFS). The regulation "led to a significant year-over-year increase in demand and substantial increase in sales price per gallon during 2011." For the first six months of 2012, revenues are up 53% and in the most recent quarter another 38.5%.
REGI's song might just be a few chords into the intro for investors as RFS mandates "the volume of renewable fuel required to be blended into transportation fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022."
As demand is sure to rise, after all it is mandated by Uncle Sam, REGI is taking steps to reduce costs by switching from more expensive virgin vegetable oils, such as soybean oil, to primarily producing biodiesel from lower cost feedstocks, such as inedible animal fat, used cooking oil and inedible corn oil. However, management cites industry overproduction of about 300 million gallons (200 million can carry into 2012) in 2011 as a possible negative on margins throughout the rest of 2012.
According to EPA EMTS data, approximately 587 million gallons of biomass-based diesel was produced during the first six months of 2012, while the regulation calls for 1 billion. The industry is waiting for the regulatory agency to set 2013 standard. In June 2011, the EPA proposed a 1.28 billion gallon biomass-based diesel volume requirement for next year and will issue a final determination as "expeditiously as practicable." Now that's funny, June 2011?
Perhaps, the oversupply is a reason why Renewable Energy has fallen from its January 2012, IPO price of $10. We think the stock might have to work through some difficulties in the next quarter or two as excess supply is worked off. Additionally, a rise in finished goods and works in progress inventories concerns us a bit, but an equally large gain in raw materials tells iStock that REGI anticipates robust, future demand.
Wall Street's gurus project earnings of $1.93 for 2013, 55.6% higher than 2012's consensus of $1.24. The top line is slated to grow at least 30% next year. If Renewable Energy Group, Inc. (REGI) hits its targets – even in 2012 – it's hard to imagine the price lingering in single digits for too long.