They are hoopin’ it up in Ames, Iowa these days. Local producer Renewable Energy Group (REGI: Nasdaq) completed the acquisition of Dynamic Fuels, Inc., one of the first renewable diesel biorefineries in the country. The Dynamic Fuels facility located in Geismar, Louisiana has 75 million gallon annual nameplate production capacity. Renewable Energy Group (REG) already had eight other fully operational biorefineries with a nameplate production capacity near 250 million gallons per year. REG also has a demonstration plant in Oklahoma for renewable chemicals.
It was a two-part deal. First REG struck a deal with for most of the assets of Syntroleum Corporation for 3.5 million shares of REGI common stock. The deal included a 50% ownership interest in Dynamic Fuels. Shortly after the Syntroleum acquisition in early June 2014, REG paid $18 million in cash to Tyson Foods for the remaining 50% interest. Tyson may also be paid up to $35 million over the next decade depending upon production volume. REG will also repay Tyson for $12 million in debt owed by Dynamic Fuels.
REG is not only on the prowl for production capacity. The company has used the acquisition strategy to build out its technology portfolio. Earlier this year REG paid $40 million in cash and stock for LS9, Inc., a developer of renewable industrial chemicals. REG may pay an additional $21.5 million over the next five years if certain milestones are reached. LS9’s technology relies on the fatty acid metabolic pathway of microorganisms, which are used to transform a variety of feedstocks into detergents and other renewable chemicals. Included among those feedstocks is glycerol, which is a by-product of REG’s biodiesel production processes, making for very nice synergy between the two companies.
Investors responded warmly to the LS9 acquisition, driving REGI shares from a price near $9.75 in early February 2014 to just over $12.50 in early May. Unfortunately, mixed signals from the first quarter 2014 financial results reported in early May, were fodder for some disappointment and the stock began a slide back down to the $10 price level. Perhaps investors also began anticipating potential dilution from the company’s $125 million convertible note deal that was completed in late May 2014. The Dynamic Fuels to near a key line of resistance near the $11.50 price level.
The question for investors is whether the stock has sufficient momentum to break through and remain above the resistance line. Based on the Average Directional Index, a trend indicator, the stock is indeed trending higher and the signal is relatively strong. Let me also note that the Moving Average Directional Index is quite favorable and is currently signaling higher prices ahead.
What is less clear for REGI is an absolute value for the stock. Technical indicators are silent on just how far the stock might go. From a fundamental standpoint, it is not very difficult to come up the raw data for an earnings forecast. The consensus estimate for the year 2015, is for $0.82 per share on $1.13 billion in sales. At a multiple of 20 times earnings, a price of $16.40 seems justified, given the company’s improved competitive position. Only one of the analysts has a price target of $16.00 while the mean price target is $13.67.
It seems prudent to accumulate shares of Renewable Energy Group at price levels below $11.50. For those with long positions at lower prices levels, that will ensure a profit in the long-term. The stock closed out trading last week with a strong volume and the engulfing pattern that formed at the week-end suggests the climber higher will continue in the new week. However, given the volatility in REGI shares, it seems more likely than not the the stock will again present a strong buying opportunities from investors.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
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.