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Biofuel Peer Financial Metrics (August 2016)

Summary

Periodic update of biofuel production margins.

Current and forecast financial metrics from select biofuel firms.

Long/short ideas.

Ethanol Market and Crush Spread

  • The forecast ethanol crush spread has declined from recent highs, but is beginning to recover
  • USDA and other forecasters are projecting a record corn crop, which could increase margins

Source: Viking Analytics. We assume 2.8 gals/bu yield, Midwestern DDG and natural gas prices, and assume dry mill corn oil extraction

Biodiesel Market and Profit Margins

  • Biodiesel producer margins are at highs not seen since 2013, and are expected to remain at high levels through the remainder of 2016.
  • Renewable diesel (not shown), made in the U.S. by Darling International (NYSE:DAR) and Renewable Energy Group (NASDAQ:REGI), enjoys higher gross margins than biodiesel.
  • LCFS credit values have fallen from recent highs, but still suggest higher margins for biomass-based diesel sold into California

Source: Viking Analytics

Biofuel Company Financial Metrics

The following table summarizes some key metrics for several biofuel companies. For these firms, whose profits depend on the spread between divergent commodities, we believe that the Enterprise Value to EBITDA metric is the best single indicator of value. The Long-term Debt to EBITDA metric is also important, as it gives an indication of the of the increased risk of equity to commodity prices. We also list the current trailing and forecast P/E ratios, as many investors prefer this metric to EBITDA.

We have highlighted the metrics in four colors. Green indicates a favorable result and/or a long bias. Red indicates an unfavorable value and/or a short bias. Yellow shaded cells indicate a neutral or mid-range value. The goldenrod color highlights a metric for which we don't necessarily have a bias for the stock price direction. Some investors consider high short interest to be bullish, and we would agree with that sentiment in general. However, high short interest may simply increase the volatility of the stock price in the short run.

Darling International

Earlier in the year, when DAR was trading in the $8/share range, we had accumulated shares, seeing a good value opportunity. While we believe that the company is well-managed with stable profit margins, we see the shares to be currently over-valued, especially in comparison to its biofuel peers. One of DAR's current goals is to "de-lever and grow," which initiative we applaud. Its relatively high levels of debt present enhanced commodity price risk to its shareholders. The high levels of debt are a legacy from DAR's acquisitions spree in mid- to late-2013, when protein and fat prices were much...


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