FutureFuel (FF) is a chemical industry company that operates in two segments: chemicals and biofuels. Biofuel is a vegetable oil or animal fat-based diesel oil that is used primarily in engines and sometimes for heating purposes. Biofuel came to the scene due to several reasons, including rising oil prices and ecological awareness. As is happened in most cases with new technology, the period of hopes was followed by a period of problems and fighting for survival. A number of companies, for example, e-Biofuels, Agri-Source Fuels and Terrabon filed for bankruptcy in 2012.
This was not the case for FutureFuel. The company remained on solid track through the whole year. It has recently released its fourth-quarter and full-year 2012 results. This is an opportunity to have a look at how biofuel is doing through the prism of FutureFuel.
FutureFuel finished 2012 with a solid performance. Revenues were $351.8 million, up 13.5% from $309.9 million in the year 2011. Net income decreased to $34.3 million from $34.5 million. The quarter-to-quarter comparison looks bleaker. Revenues were down 16.8%, while net income suffered a 41.5% decrease. This happened because the biodiesel industry met its mandated usage requirement early in the fourth quarter of 2012.
Are the results good enough to satisfy investors?
Price action on March 19, tells us that investors are not satisfied. After reading the earnings report, they sold the stock. The stock finished at 12.40, losing 9.22% compared with the previous day's close. Is this an opportunity to get the stock at a bargain price?
When examining the results, one should mind that in 2012 the company operated without the $1 per gallon biodiesel tax credit, but now it has been retroactively imposed until the end of 2013. It means the government is still in the game, although not ready for a really long-term commitment.
In 2012, FutureFuel has paid regular dividends of 0.10 per share. The company plans to lift the dividends to 0.11 per share in 2013. It doesn't seem much, but it's important to notice that in the end of 2012 FutureFuel paid a special dividend of 1.2. If this year is at least the same as the previous financially, one can expect this to happen again. At current price levels, that would mean a 3.56% dividend without the special one. If the "gift" were paid again in the same amount, this would lead to a 13.23% dividend.
FutureFuel has zero debt. It finances all of its operations with its own money. In the annual report the company states that it has an agreement of $50 million revolver credit. In my opinion, it is unlikely such credit could be used. According to Biodiesel Magazine, there were 193 biodiesel plants in existence in the United States with combined capacity of 2.918 billion gallons. This capacity has never been fully utilized, and I think it is unlikely that it would be utilized in the near future.
What I like about FutureFuel is that the company is profitable, does not have debt and pays dividends. However, there are certain risks. Some of them are company specific, while others are industry specific.
The principal risk factor for the industry is a cancellation of RFS2 federal mandate. Currently, it is the main demand driver. It is hard to predict whether it would be increased. The industry could produce more, but demand is restricted to mainly the U.S. because the European Union imposed anti dumping measures on biofuel from the U.S. The problem with the mandate was clearly shown to investors in the 4th quarter of 2012. More production in the beginning of the year has led the mandate amount to be reached sooner than the end of the year. This led to poorer quarterly results as compared with those of 2011.
The biodiesel tax credit matters too. Although it has been imposed until the end of 2013, no one can know for sure whether it will be prolonged in 2014 and further.
The company states that in its chemicals segment it relies heavily on only two customers. In the biofuel segment, one customer brings 54% of revenue. Such dependence on very few customers gives those customers more control and bargaining power. This could be a significant risk over a longer time period.
Having read all of the above, should you add FutureFuel to your portfolio? I think that given current price levels it could be a chance to get an exposure for biofuel at a reasonable price. The company is solid, profitable and with no debt. You can expect dividends throughout the year, and maybe a dividend Christmas gift like in the year of 2012. The $14 level appears to be a current resistance level for prices, and it's more than 13% upside from present prices.