A few years after producing its 1 billionth gallon of biodiesel, Renewable Energy Group (NASDAQ: REGI) earned a $1 billion market cap for the first time in its history last month. The milestone didn't look like it would be met exiting July, but it happened after shares gained an incredible 58% in August, according to data provided by S&P Global Market Intelligence.
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That wasn't even the most important milestone the business reached last month. What really had investors excited were the numbers in the second-quarter 2018 earnings report, which seem to indicate that the business can be sustainably profitable without any help from federal subsidies for renewable fuels. That's huge for investors and the stock is still significantly undervalued.
In the second quarter of 2018, Renewable Energy Group delivered only 9% revenue growth compared to the year-ago period, but it reported a monstrous 83% surge in gross profit and a 646% leap in operating income. That went along with a 115% rise in adjusted EBITDA. More importantly, the business reported net income of $33 million.
While it may not seem like much considering it was only the second straight quarter with positive net income, it's the first time that's happened in the company's history without federal tax credits, which lapsed at the end of 2017. The factors contributing to the solid performance -- strong operating efficiency, supply agreements with fleet customers, and increasing sales of petroleum-based fuels -- are sustainable, which has Wall Street thinking the profits are, too.
The volatility of federal subsidies for renewable fuels has served as the crucial argument explaining why Renewable Energy Group was chronically undervalued. Take the argument away, however, and Mr. Market suddenly has a lot of catching up to do.
Despite a nearly 60% surge in stock price in August, there's still a ways to go. Renewable Energy Group stock trades at a P/E ratio of just five, an EV-to-EBITDA value of 3.7, and sports a PEG ratio of 0.25. While investors will want to be careful not to get too carried away, I do think there's an opportunity here for those with a long-term mindset.
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