Best stock to invest in
Insider buying is not one of my regular screening criteria in
selecting long plays in the small cap sector. However, to
learn a chief executive officer has taken out his/her check book to
buy shares in their company is influential. In November 2016,
the CEO of biofuel producer Renewable
Energy Group (REGI:
Nasdaq) reported an increase in his stake in the company in recent
With REGI shares just above the prices paid by the CEO just three
months ago, it is timely to look more closely from the outside.
In the most recently reported twelve months, Renewable Energy Group
produced $1.87 billion in total sales of renewable diesel and
chemicals, resulting in a net loss of $71.9 million or $1.70 per
share. Those two metrics are only part of the story as the
company also reported generating $52.2 million in operating cash
flow in the same period. Using its typically low-cost
feedstock such as inedible corn oil and used cooking oil, the
company lays claim to being a low cost biofuel producer.
Nonetheless, the company has come through a particularly tough
period in 2015, when thin margins failed to deliver enough profit to
cover fixed costs. Yet even during this difficult period,
operating cash flows remained positive.
Free cash flow, that is operating cash flows net of investment
requirements, may be a more helpful metric to evaluate a renewable
energy producer. REG operates a dozen biorefineries in North
America with total nameplate capacity just over 450 million gallons
per year. The company is moving aggressively to expand its
footprint. In November 2016, management trooped out to Iowa to
stage a showy groundbreaking ceremony with Iowa’s high profile
governor, Terry Branstad. The group turned over first shovels
on a project to expand its Ralston biorefinery capacity from 12
million to 30 million gallons.
The price tag for the Ralston expansion is estimated at $24
million. This is easily fit into the company’s regular
budget. Renewable Energy invested $42.8 million into its
plants in the first nine months of 2016. Indeed, capital
investment has averaged $54.6 million per year over the last three
years. Operating cash flows have been more than ample to cover
capital investments into existing plant and equipment, leaving $29.5
million in average annual free cash flow.
REG management has had no difficulty in finding places to use that
extra cash. Approximately $84.4 million in cash has been used
to acquire new operations since the beginning of 2013. The
most recent deal in March 2016, was the acquisition of a biodiesel
refinery in Wisconsin owned by Sanimax Energy. REG paid a
total of $21.1 million for 20-million gallons in nameplate capacity
in a combination of cash and stock.
A more significant deal was struck in August 2015, for a facility in
Grays Harbor, Washington that added 100 million gallons to the
company’s total capacity. A total of $36.7 million in cash and
stock valued at $15.3 million were paid up front. An
additional $5.0 million was promised contingent upon achievement of
milestones in renewable diesel production in 2016 and 2017.
A growing, profitable operation should be of interest for most
investors. The one reservation that investors should have
regarding REGI, is the possible fall out of favor for renewable
energy producers. REG management has come out in support of a
recent proposal for the 2017 standard set by the Environmental
Protection Agency for Advanced Biofuel Renewable Volume Obligation
from 4.0 billion gallons to 4.28 billion gallons.
Biomass-based diesel is a direct beneficiary of the standard.
Given the antipathy expressed by the incoming occupant of the Oval
Office toward the environment and climate, renewable energy may not
be a particular priority. Indeed, petroleum-based energy is
most often the lips of Trump and his surrogates. Hopefully,
REG management made a good impression on Branstad while they were in
Iowa to put a good word in for renewable diesel.
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
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.
– Best stock to invest in