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Renewable Energy Group, Inc. (REGI) Message Board

  • valuationstation valuationstation Jan 11, 2013 9:04 AM Flag

    motley fool: inventory analysis shows co. expects growth

    In yahoo finance motley fool has an article, A Hidden Reason REGI's future looks bright.

    That reason is based on inventory analysis -- reduction in finished product inventory alongside increase in raw materials inventory, graphed alongside of product sales volume. TTM shows sales up, inventory down, with a reduction in finished goods inventory.

    This is consistent with the mandated biodiesel blending requirement which increases total demand for biodiesel in 2013 by 28% YoY. And the ability of REGI to meet this demand is assured by the acquisition of multiple new facilities last year, making them the largest independent biodiesel producer.

    What does this mean for the bottom line? Looking at the blender $1 per gallon tax credit just passed bu congress for 2013 and also retroactive to 2012, it means guaranteed volume of sales increase AND guaranteed profit margins. That is true regardless of 2013 soybean crop behavior. REGI 8k filing this week clearly states they will book the retroactive 2012 credit during this quarter that they project is going to equal 1/3 of 2012 gallons biodiesel sold. That's about $60 million or $2 contribution from the tax credit towards quarterly EPS. Add to that nother $2.50 to $2.80 for anticipated current year taxedit and yoarrive at 2013 EPS around $4.50 to $5.00 -- very close to current share price.

    Once the market picks up on the fact that 2013
    P/E is only 1.25 to 1.5, this stock could really take off.

    Sentiment: Strong Buy

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    • Would expect the market to treat the $2/sh tax credit payment (the retroactive 2012 payment) as an unusual item, i.e. akin to a gain from the sale of property. It would be excluded from ordinary income and not be used in price earnings calculations.

      Where the payment really helps is on the balance sheet. It will be increasing cash by about the amount of the company's long term debt and could be used to wipe it out. However, it is more probable the company will use it to further its expansion plans. You might have noticed the company's press release yesterday cited a promotion which emphasizes business development. The company reiterates its intention to pursue its strategic goals including " optimizing and expanding its fully-integrated biodiesel offerings; diversifying into the production of additional advanced biofuels, renewable chemicals and related products and services; growing its biodiesel business internationally; and expanding its intellectual property base." I see the importance of the $60M windfall as accelerating the company's ability to further these goals without shareholders being concerned it would be done through stock sales. The tax credit effect on 2013 cash follow will also be helpful in this regard.

      With the increase in the RFS standard, the biodiesel industry is moving toward eliminating the surplus capacity that has been a disruptive factor. While industry name plate capacity is often put at 2.0 bgy, actual productive capacity would be closer to 90% of name plate. With the RFS at 1.28 presently and last years production being about that amount, it would not be unreasonable to think 2013 could see 1.60 bgy produced. This is closing in a production capacity and improved stability will be a likely result. The extra cash will definitely enhance REGI's ability to take advantage of the opportunities presented. Also as AMRS, GEVO, and SZYM work out their production problems and prove renewal chemicals are a viable path, a move by REGI into the space becomes increasingly probable. And the cash will be on hand to support the move.

      2013 and beyond is looking better and better (though crush rates will continue to be a near term concern).

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