Yes, it’s possible to invest in cow poo — or at least the product that is derived from it. Renewable natural gas (RNG) is a transportation fuel made from organic waste, primarily from cattle. Once it’s purified, this biomethane is chemically identical to the main ingredient in the fossil-based natural gas that comes out of a stove or heats residential water. The use of RNGs drastically reduces carbon emissions, and unlike conventional natural gas, RNG is not a fossil fuel and does not involve drilling. That said, the leader in this sector is Clean Energy Fuels (NASDAQ:CLNE) — but CLNE stock may lose its one-year gains of the firm doesn’t figure things out.
Overall, Clean Energy Fuels provides natural gas as an alternative fuel for vehicle fleets and related fueling solutions, primarily in the United States and Canada. It supplies RNG, compressed natural gas (CNG) and liquefied natural gas (LNG) for light, medium, and heavy-duty vehicles. Additionally, the company offers operation and maintenance services for public and private vehicle fleet customer stations.
Moreover, the company also designs, builds, operates and maintains fueling stations. It also sells and services compressors and other equipment that are used in fueling stations, and provides assessment, design and modification solutions to offer operators with code-compliant service and maintenance facilities for natural gas vehicle fleets.
Collectively, Clean Energy Fuels serves heavy-duty trucking, airports, refuse, public transit, industrial, and institutional energy users, as well as government fleets. As of December 31, 2020, it served approximately 1,000 fleet customers operating approximately 48,000 vehicles. And it also owned, operated, or supplied approximately 565 fueling stations in 39 states in the United States and five provinces in Canada.
The Opportunity and Benefit of Clean Energy
According to the company, livestock manure and landfills account for 27% of methane emissions in the U.S. That said, this is the original source of where Clean Energy Fuels gets its RNG.
When organic matter decays, it naturally produces methane — one of the greenhouse gases most detrimental to the environment. So, by capturing the methane, the company prevents it from entering and damaging the atmosphere. Then, they can then turn it into clean fuel for the transportation industry. That said, the transportation industry — as a whole — was responsible for 29% of the total greenhouse gas emissions in the U.S. in 2019.
This all sounds great, so there must be a catch. Well, the catch is that Clean Energy Fuels has been around a very long time, but still cant generate consistent high margin profits. That said, here is a very-detailed explanation of why the company is struggling in that department:
“…The only logical explanation is that Clean Energy owns a very small percentage of the 540 fueling stations spread across the USA. It operates, maintains and supplies the fueling station with natural gases at commodity prices plus charges for transportation, compression, storage and maintenance. While Clean Energy has adopted an excellent business model, unfortunately, it operates in an area of the value chain with minimal operating margins.”
“Over the past five years, Clean Energy Fuels has consistently failed to produce positive operating margins. While SG&A (selling, general and administrative) expenses have fallen by roughly $5 million each of the previous three years, it hasn’t resulted in sustained positive margins. To help hide the negative operating and profit margins, management tends to focus on adjusted EBITDA. This is simply an alternate accounting method, which hides real world expenses and shouldn’t be considered a route to profitability.”
Furthermore, analyst earnings per share (EPS) estimates for 2021 and 2022 are only 3 cents and 4 cents, respectively, despite revenue estimates of about $323 and $364 million for the same period. So, although transportation issues were and are abundant during the novel coronavirus pandemic, the profitability issues don’t seem to be subsiding for Clean Energy Fuels.
Bottom Line on CLNE Stock
As a whole, Clean Energy stock was a Reddit meme driven favorite earlier in the year. In fact, shares are up more than 200% over the past year after hitting a high of $19.79 per share in February.
However, CLNE stock has really taken a tumble in the months since — losing nearly 60% of its value. And unless the company offers a clear path to much higher margins, the stock will likely return to its long-term trading range of $2 to $3.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.