Biodiesel stocks have been picking up steam in 2013, with a swift recovery in RIN prices and a return to profitability at many of the majors. For instance, Renewable Energy Group Inc. (NASDAQ: REGI) and Green Plains Renewable Energy Inc. (NASDAQ: GPRE) are trading up 146% and 100% so far this year, respectively. Meanwhile, RIN prices have risen some 2,100% since the end of 2012, helping boost the profitability of many larger biodiesel producers.
Methes Energies International Inc. (NASDAQ: MEIL), a renewable energy company that offers an array of products and services to biodiesel producers, has seen its stock fall about 35% over the same time period. While its most recent quarter may seem to justify this fall, investors looking a little more closely will find a company that's in the process of ramping up their production, which could lead to improved numbers in the second half of this year. As a result, it may be worth a second look for investors, as the market continues to improve.
Top-Line Results Are Understated
Methes Energies reported revenues that increased 12% last quarter, driven by internal production of biodiesel that increased 57% to $1.06 million. While this may seem relatively modest, the average selling prices were constrained by a fixed price contract and start-up issues at its new Sombra facility which resulted in delayed shipments and lower production. The resolution of these start-up issues and higher pricing could unleash significantly improved results ahead.
By comparison, Renewable Energy Group’s revenues increased 80% during the same quarter, but this was driven almost exclusively by increased government incentives. These incentives reflect the retroactive application of the blender's tax credit for 2012, meaning that the revenues are one-time and growth would have otherwise been relatively flat. Given these revelations, Methes Energies’ results may have actually been more favorable on the top-line.
One-Time Costs Hit Bottom-Line
Methes Energies' bottom-line appeared to be the major cause for concern on the surface, with its net loss increasing $911,000 to $1.49 million, compared to $579,000 during the year ago period. But again, a closer look reveals that many of these expenses were associated with the Sombra facility's costs, including increased salaries and wages. And given the early production problems, the true gross margins of the business are yet to be seen in the financial results.
Selling, general and administrative expenses increased $522,000, or 54%, due to a $270,000 increase in salaries, $61,000 increase in utilities, and $89,000 increase in professional fees, which were primarily associated with the new facility. Cost of goods sold also increased 32% to $540,000 due to an increase in biodiesel sales and higher freight costs. The additional top-line revenues expected in the quarters ahead should help Methes scale to profitability.
Looking Ahead To 2013 & Beyond
Methes Energies trades with a market capitalization of $17.1 million, making it one of the smaller biodiesel producers in the market. But with its Sombra facility coming online, investors could see its production and revenues scale significantly higher. The facility houses two Denami 3000 processors with a total capacity of 13 million gallons of biodiesel per year, which could support revenues of $55.9 million per year, assuming $4.30 per gallon prices.
Management expects these results will help the company achieve an overall positive cash flow by 2H 2013, according to recent SEC filings. Over the long-term, the facility could handle as many as six processors that could produce 39.6 million gallons of biodiesel per year, while management plans to install two of these additional processors by May 2014. Six processors could triple that figure to $167.7 million per year, yielding significant room for growth.
Methes Energies represents an attractive investment opportunity at its current levels. With a market capitalization of $17.1 million, investors can acquire a company that could be running at a $55.9 million annual run rate within a few short quarters, while its latest quarter may have been largely misunderstood by the market. Investors interested in learning more should visit the company’s website at http://www.methes.com/.
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