Renewable Energy Group: Deep Discounted Green Play Can Easily Double
Renewable Energy Group: Why This Beaten-Up Dog Can Recover
We know there’s minimal federal support in the U.S. at this time for green energy, but that doesn’t mean the alternative energy sector should be shunned. The rest of the world is behind a move toward cleaner energy.
While the main focus is on solar, wind, and battery power, one area that is often overlooked is the production of biomass-based diesel as an alternative to fossil fuels.
If this intrigues you, Renewable Energy Group Inc (NASDAQ:REGI) is worth a look. The company uses natural fats, oils, and greases to produce biomass diesel that is clean and has a lower carbon footprint.
The majority of facilities are in the U.S, but the company is focused on major expansion to the greener pastures of Europe.
This small-cap stock is down 33% over the past three months and down more than 50% from its 52-week high of $32.52 in October 2018.
Chart courtesy of StockCharts.com
The Fundamentals Support a Bull Case for REGI Stock
The thing you will notice about Renewable Energy Group stock is its strong revenue growth.
Despite being a relatively small company with about $584.0 million in market cap, Renewable Energy Group generated $2.4 billion in revenues in 2018, recording four consecutive years of growth and nearly doubling from 2014.
| Fiscal Year | Revenue (Billions) | Growth |
| 2014 | $1.3 | |
| 2015 | $1.4 | 9.0% |
| 2016 | $2.0 | 47.1% |
| 2017 | $2.2 | 5.6% |
| 2018 | $2.4 | 10.6% |
(Source: “Renewable Energy Group Inc.” MarketWatch, last accessed July 18, 2019.)
Now there are some concerns about REGI, as revenues are expected to contract 4.2% to $2.3 billion in 2019, but this is already factored into the weak share price. (Source: Renewable Energy Group, Inc. (REGI),” Yahoo! Finance, last accessed July 18, 2019.)
The good news is that the company is estimated to ramp up its revenues by 12.1% to $2.6 billion in 2020.
REGI has been delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA). The company’s EBITDA surged 607.2% to $332.42 million in 2018.
| Fiscal Year | EBITDA (Millions) | Growth |
| 2014 | $40.4 | |
| 2015 | $10.4 | -74.2% |
| 2016 | $133.8 | 1,183.5% |
| 2017 | $47.0 | -64.9% |
| 2018 | $332.4 | 607.2% |
(Source: MarketWatch, op. cit.)
Renewable Energy Group has been generating profits, achieving a 419.2% jump to $6.52 diluted earnings per share (EPS) in 2018, albeit the number was extreme.
| Fiscal Year | Diluted EPS | Growth |
| 2014 | $1.99 | |
| 2015 | -$3.44 | -272.9% |
| 2016 | $1.06 | 130.8% |
| 2017 | -$2.04 | -292.6% |
| 2018 | $6.52 | 419.2% |
(Source: Ibid.)
For 2019, REGI is expected to report a decline in earnings to $0.06 per diluted share, but come back with $2.03 per diluted share in 2020. (Source: Yahoo! Finance, op. cit.)
The first quarter saw earnings fall 64% short of the consensus, which led to investors selling their shares, but if the company can deliver in 2020, REGI stock could surge.
Renewable Energy Group Inc delivered an impressive positive free cash flow (FCF) of $319.1 million in 2018, up 945% from 2017, but I expect the company’s FCF to fall back.
| Fiscal Year | FCF (Millions) | Growth |
| 2014 | -$27.6 | |
| 2015 | $15.7 | 156.8% |
| 2016 | $14.6 | -6.9% |
| 2017 | -$37.8 | -358.7% |
| 2018 | $319.1 | 945% |
(Source: MarketWatch, op. cit.)
Analyst Take
In my view, the fundamentals support a higher price for REGI stock. The company’s expected financial weakness in 2019 has already been discounted into Renewable Energy Group’s share price.
Insiders have been buying Renewable Energy Group stock, which is a bullish sign.
The stock trades at a mere 7.7 times its 2020 consensus. A doubling in the multiple and the share price is clearly in the cards for aggressive traders.
