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Gevo vs. Renewable Energy Group: Which Biofuel Stock Is a Better Choice?

Gevo (GEVO) and Renewable Energy Group (REGI) are two players in the biofuel space. While the two companies are part of expanding addressable markets, their stocks have lost significant momentum after touching multi-year highs recently. Which between the two presents an attractive investment opportunity right now?

As climate change concerns have gained pace in recent times, governments around the world are investing heavily in clean energy solutions.  As a result, there are several companies that are expanding their portfolio of renewable energy assets in wind, solar and hydropower.

In addition, biofuel is a renewable energy source that is fast gaining traction due to its pertinence in the transportation space. Biofuels are widely expected to lower carbon emissions and reduce the dependence on fossil fuel products by a significant margin. In fact, Market Research Future expects the biofuel market to touch $246 billion by the end of 2027, growing at an annual rate of 7.8% in this period.

With this in mind, today I’ll analyze Gevo (GEVO) and Renewable Energy Group (REGI), to determine which biofuel stock is a better buy right now.

Gevo is valued at a market cap of $1.31 billion

A renewable fuels company, Gevo commercializes gasoline, jet fuel and diesel fuel to achieve zero carbon emissions while reducing greenhouse gas emissions with sustainable solutions. Gevo’s products include renewable biodiesel, isooctane, sustainable aviation fuel, as well as animal feed.

Gevo stock has gained close to 50% year to date. Despite these market-beating returns, it's also down 53% from its 52-week high, allowing investors an opportunity to buy the dip.  Similar to most other early-stage companies Gevo stock is expected to remain volatile as its revenue and earnings visibility is low.

The company recently announced its wholly-owned renewable natural gas (RNG) project company signed definite agreements with BP Canada Energy Marketing and BP Products North America. The RNG project is likely to begin in early 2022 and will generate between $9 million and $16 million in cash distributions each year.

Gevo is forecast to increase sales from $1.34 million in 2021 to $4.36 million in 2022. It suggests the stock is valued at a sky-high price to forward 2022 sales multiple of 300x making it extremely risky.

A lot will depend on Gevo’s partnerships with enterprises that view its products as commercially viable. Energy giant Chevron’s subsidiary announced it would invest in Gevo’s facilities in exchange for the right to purchase 150 million gallons of fuel each year.

Renewable Energy Group is down 31% in 2021

A company that provides lower-carbon transportation fuels, Renewable Energy Group is valued at a market cap of $2.4 billion. The stock went public in early 2012 and has returned 384% in less than 10 years. However, it's also down 57% from record highs.

In the second quarter of 2021, the company produced 132 million gallons of fuel and sold 163 million gallons generating $816 million in sales. Its revenue soared by 50.1% compared to $544 million in the year ago period. 

REGI reported an EBITDA profit of $103 million and a net income of $79 million in Q2. In the same period last year, its EBITDA loss stood at $6 million while its net loss was $2 million.

Now, analysts expect its sales to increase by 41.5% to $3 billion in 2021 while adjusted earnings per share is forecast to rise by 70% to $4.7. So, REGI stock is valued at a forward price to sales multiple of 0.8x and a price to earnings multiple of 10x.

The verdict

I believe REGI to currently be the better buy. GEVO is extremely expensive and has reported a massive loss. REGI, on the other hand, is grossly undervalued and consistently profitable.

GEVO shares were trading at $6.80 per share on Wednesday afternoon, up $0.31 (+4.78%). Year-to-date, GEVO has gained 60.00%, versus a 20.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.


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