CLNE - Clean Energy Fuels: Lackluster Performance And Likely No Catalyst In Coming Report

2023-08-02 11:44:01 ET

Summary

• Clean Energy Fuels produces renewable natural gas but has yet to turn a profit, diluting shareholders.
• CLNE has a broad set of revenue streams, including RNG, CNG, and LNG, and has potential for revenue growth from companies like Amazon.
• The upcoming earnings report is unlikely to show significant margin expansion, and the high valuation of CLNE raises concerns about its profitability and risks.

Investment Rundown

Investing in clean energy doesn't make you think of investing in a company engaging in natural gas and liquefied natural gas too, but that is the case with Clean Energy Fuels Corp (CLNE). The company is producing renewable natural gas ('RNG') but has yet to turn a profit. The company has instead been diluting shares significantly over a period of time. This lack of appreciation is combined with the fact they are far from profitable at a negative net margin of 15.6%.

The ratings of the company are mixed but most of the ones that appear to make sense, at least to me, view them as a sell. This highlights that opinions on the company are quite mixed, but as we will learn in this article, the company seems best presented as a sell.

Company Segments

As I quickly mentioned at the beginning part of the article, CLNE has a broad set of revenue streams, including RNG, CNG, and LNG. The company has been in operation since 2001 but seems to lack the capability of turning a profit. It supplies natural gases to medium and heavy-duty vehicles. Besides that, they offer operation and maintenance services for public and private fleet customer stations.

At a glance, CLNE might look quite interesting given the fact they have some very well-known companies in the US apart from their customer base. The growing RNG volumes for the company come at the back of companies like Amazon ( AMZN ) wanting to have a more environmentally friendly fleet of vehicles. This should fuel revenue growth for CLNE going forward but I do doubt that it will translate to the company feeling the need to stop diluting shares.

We are not far off from the next earnings report from CLNE. It's expected to be on August 9. I don't think we are getting any significant news that would be able to justify making CLNE anything but a sell right now. There is still a far way to go until the net margins become positive and even after that the risk of continued share dilution still hovers over the company.

Their constant demands for finding new and better ways of generating energy for our societies and the push for renewable sources are great. I don't think anyone expects us to be completely free of oil and coal by 2050 as they make up such a large part of the total energy generation. But I find it likely they will make up a lower portion, and some of that will be given over to RNG for example. Renewable natural gas aims to make the most of our current systems and translate what might otherwise be waste into something useful. Livestock waste, landfills, and other organic waste operations are placed in conventional natural gas systems. These are then transformed into RNG which can be used to generate energy for power vehicles which CLNE is focusing on.

CLNE aims to operate from a distribution system that offers RNG. This is creating a very scalable business model that is likely to benefit the revenues of CLNE in the long run. What is less certain though is the margins of the business. I don't think we are likely to see positive EPS until a fair bit out, unfortunately. In the meantime, there is too much risk associated with the company to make it even remotely appealing in my opinion.

Upcoming Earnings

We are not far off from the next earnings report and I think a lot of investors will have their focus on the possibility of CLNE producing a solid margin expansion. But I do find that unlikely as they need to scale their business far more for that to be possible. Once they have operations up and running at a larger scale they can potentially begin leveraging their operations to generate positive net margins.

Struggling EPS performances make me quite pessimistic about the coming report. The last one certainly didn't appeal to investors as CLNE missed quite badly on the estimates. EPS estimates for Q2 FY2023 sit at $(0.02). But I believe investors should brace for a miss here and anticipate the share price falling along with it. The share price is already down 20% in the last 12 months along with some dilution.

Compared To The Sector

As I have mentioned earlier I think that CLNE is trading at a premium, at a too high when to pay for. Seeing as the bottom line is negative there is no point in comparing the p/e. But looking at the EV/EBITDA on a FWD basis it sits at a 22x multiple. That is 284% above the sector, indicating investors are having to take on a significant premium to get into the company. Further highlighting the risks and rich valuation is the P/FCF which is at 27 on a FWD basis. That is far above the sector's 4.7 average. I think we are far out from seeing these multiples decline significantly.

Risks

The primary challenge in Clean Energy's business has long been its struggle to generate substantial gross margins from fuel sales. While the company's commitment to providing fuel savings to customers aligns with its goal of promoting environmentally-friendly practices and lowering carbon emissions, it leaves Clean Energy with minimal profits from its innovative fuel concept.

Despite the company's dedication to renewable fuels and sustainability, the stock currently trades at approximately 22 times adjusted EBITDA, which raises concerns about its valuation. Such a high multiple seems overly expensive for a business operating in a risky, low-margin industry. It appears that investors are still heavily focused on the renewable fuels concept rather than the underlying fundamentals of the company.

The renewable energy sector undoubtedly holds immense growth potential and aligns with the global push toward sustainability. However, the current valuation may not adequately reflect the risks associated with the business model, particularly in a competitive market where margins remain slim. Investors should carefully assess the long-term financial prospects and evaluate whether the premium valuation is justified given the inherent uncertainties.

What could make my sell rating turn out to be wrong is if CLNE manages to raise margins significantly and no longer needs to dilute shares. These are some of the issues I have with the company, but if RNG prices significantly appreciate this could be possible, although I do find it unlikely.

Final Words

CLNE has a lot of potential being a major supplier of RNG for customers all across the United States. But the severe lack of profitability is leaving a lot to be desired from the company I think. Besides this, the company has a high valuation when looking at the EV/EBITDA.

Investing in renewable energy is something that a lot of investors wish to do, but finding reliable ones is not that easy. Why I think CLNE is a sell right now comes from the fact they are lacking sufficient margins and also diluting shares. There seems to be a far way out until we can expect sustainable EPS reports from CLNE. The risk profile here is too much to invest in despite the promises of RNG in my opinion. Concluding the article I am rating CLNE a sell right now.

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