Take A Look At This Small Cap Biodiesel Producer For 2014

Renewable Energy Group has been the largest producer of biodiesel energy in the country since 2011. The company’s operations range from acquiring feedstock to distribution of the final product. Renewable Energy regards itself as a “low cost” biodiesel producer, typically corn oil and animal fat.

Although the EPA expects 2014 biofuel production to fall, investors should not automatically discount these producers. Wedbush, for example, believes the drop in demand is already priced into shares of Renewable Energy.

Competitive Outlook

One of the company’s key competitive advantages is its low cost. Because inputs for production are flexible, Renewable Energy is able to easily respond to changes in price.

In their annual report, the company cites Archer Daniels Midland ADM, Cargill, Louis Dreyfus, and Ag Processings as key production competitors. Of course, biodiesel producers are also in competition with traditional fossil fuels, namely oil, which is down roughly 10 percent since August highs. A key advantage biodiesel producers have on fossil fuels are global government subsidies.

Financials

Year over year, revenue is up 41.7 percent for the most recent quarter, ended September 30th. Correspondingly, earnings jumped from a six million dollar loss to an 87 million dollar gain. A key place where the company made money is cost of goods sold, which fell from 98.5 percent to 86.9 percent year over year. In addition, SGA expenses rose just three million dollars on a 135 million dollar upswing in revenue.

On a yearly basis, revenue is up 23.2 percent from 2011 to 2012, and 669 percent over the past five years. As strong as this revenue figure looks, income fell from 89 million to 19 million from 2011 to 2012 as cost of goods sold spiked higher. The cost increase can be largely credited to higher biodiesel production increasing raw material demand.

Although Renewable Energy Group only has one customer purchasing making up more than percent of revenue, Pilot Travel Centers made up 36 percent of 2012 revenue and 23 percent of 2011 revenue. The loss of this customer would be very detrimental. Contracts are typically for a one year period, with the current contract set to expire at the end of the year (2013). The annual report gives no indication as to the status of the relationship with Pilot.

Insiders and Institutions

Over the course of the year, a director has been engaged in aggressive selling, especially this summer when shares were around the 15 dollar level. Conversely, the CEO and CFO purchased small lots for roughly $13 in August.

Institutions have loved the stock, increasing their ownership more than 46 percent last quarter, and almost 26.7 percent this quarter. Mutual funds have followed a similar pattern, adding more than a 30 percent stake for each of the past two quarters.

Up almost 100 percent this year, shares are down 25 percent over the past three quarters and are currently trading at $11.55.