Vertex Energy, Inc. (VTNR) in Houston, Tex., is a lesser-known specialty refiner of alternative feedstocks and marketer of high-purity petroleum products. It has been taking several steps of late to transition into a renewable-energy-focused company. Its stock has gained 484.6% in price over the past year to close yesterday’s trading session at $4.75. Also, on Dec. 1, 2021, Credit Suisse Group AG (CS) analyst Manav Gupta initiated coverage of VTNR with an ‘Outperform’ rating and a price target of $13.

However, the stock has declined 12.8% in price over the past three months and 57% over the past six months. 

VTNR has agreed to acquire an oil refinery located in Mobile, Alabama, from Equilon Enterprises LLC d/b/a Shell Oil Products US in the first quarter of its fiscal 2022. To that end, in Oct. 2021, VTNR announced the pricing of a private offering of $155 million of senior convertible notes, due 2027. However, the stock plunged on the news on investor concerns about the interest payment obligation that comes with debt. So, VTNR’s near-term prospects look bleak.

Here are the factors that could shape VTNR’s performance in the upcoming months:

Sale of Assets

On Sept. 28, 2021, VTNR shareholders approved the proposed sale of its portfolio of used motor oil collection and recycling assets to Safety-Kleen Systems, Inc. for  $140 million in cash. However, in November 2021, the U.S. Federal Trade Commission (FTC) requested additional information and documents from the company in conjunction with its proposed asset sale to Safety-Kleen. So, it is uncertain if the divestiture will be completed in the first half of its fiscal 2022.

Unimpressive Financials

VTNR’s revenues increased 78.3% year-over-year to $28.97 million for the third quarter, ended Sept.30, 2021. However, the company’s gross profit declined 2.8% year-over-year to $786,178. While its total operating expenses came in at $4.97 million, up 167.3% year-over-year, its loss from operations increased 298.1% year-over-year to $4.19 million. Also, its FCF came in at negative $4.23 million, versus $5 million in the year-ago period.

Low Profitability

In terms of trailing-12-month gross profit margin, VTNR’s 13.15% is 66.2% lower than the 38.88% industry average. The stock’s negative trailing-12-month EBITDA margin compares with the 20.79% industry average. Furthermore, its trailing-12-month ROCE, ROTC, and ROTA are negative, versus the  2.79%, 3.51%, and 1.04% respective industry averages.

Stretched Valuation

In terms of forward non-GAAP P/E, VTNR’s 251.50x is 1,978.3% higher than the 12.10x industry average. And the stock’s 179.57x forward EV/EBITDA is 2,133.1% higher than the 8.04x industry average. Also, its forward P/S and P/B of 1.52x and 4.16x, respectively, are higher than the 1.48x and 1.74x  industry averages.

POWR Ratings Reflect Bleak Prospects

VTNR has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. VTNR has a D grade for Stability, which is in sync with its beta of 1.79.

The stock has a D grade for Value, which is consistent with its higher-than-industry valuation ratios.

In addition to the POWR Rating grades I have just highlighted, we have rated it for Growth, Momentum, Sentiment, and Quality. Get all the VTNR ratings here. Also, VTNR is ranked #73 out of 78 stocks in the Energy - Oil & Gas industry.

Bottom Line

VTNR has been taking steps to transition into a renewable-energy-focused company, but it is still in the early stages of the transition. Analysts expect its revenue to decline 26.7% year-over-year to $29.37 million for the quarter ended Dec. 31, 2021. In addition, its EPS is expected to remain negative in its fiscal 2021 and in the quarter ending March 31, 2022. So, we think it could be wise to avoid the stock now.

How Does Vertex Energy (VTNR) Stack Up Against its Peers?

While VTNR has an overall POWR Rating of D, one might want to consider investing in its industry peers having an A (Strong Buy) rating: VAALCO Energy, Inc. (EGY), SilverBow Resources, Inc. (SBOW), and China Petroleum & Chemical Corporation (SNP).

Note that SBOW is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

VTNR shares rose $0.04 (+0.84%) in premarket trading Thursday. Year-to-date, VTNR has gained 5.74%, versus a -1.34% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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