For Biofuels, This Firm Looks Beyond Corn

Nova doesn't yet generate revenue from any of its refineries, but President J.D. McGraw says that it will soon be able to operate profitably without the help of government tax breaks or subsidies. That's good news for investors at a time when political support for an energy source can suddenly dry up, as is happening with corn-derived ethanol.

Nova closed Thursday at $2.58, but in a recent research report, analysts at investment bank Natexis Bleichroeder gave Nova a fair market value of $7 a share based on their discounted cash flow and price-to-earnings analyses.

Nova plans to have three refineries operating by the end of 2008 with a production capacity of 220 million gallons of biodiesel annually. By 2010 it hopes to have seven refineries, each producing between 20 million and 100 million gallons of fuel a year.

The company recently signed a 10-year contract with ConAgra (CAG Quote) to supply its refineries with feedstock, allowing it to lock in expenses at a favorable rate. According to McGraw, the total cost of Nova's product is about $2 a gallon, while it can sell its diesel wholesale for $3.17 a gallon. That gives Nova an industry-leading profit margin of roughly 58%.

Additionally, the company has an impressive management team at its helm. Chairman and CEO Kenneth Hern was previously the president of Texaco units in Saudi Arabia and Brazil, and Chief Operating Officer Jody Powers was the president of Halliburton's(HAL Quote) energy services division. A number of other executives have years of experience across a wide swath of the energy spectrum.

As the interest in alternative energy continues to grow, which is a near certainty, this name, though small for now, could be one to watch.