If you're looking for growth in the chemical industry, should you invest in FutureFuel (NYSE:FF) to reap solid benefits in the future? While investors are patiently awaiting the release of Q2 2013 financial results on August 9, 2013, in this article I aim to deliver a clearer picture on where FutureFuel currently stands. With the FF stock expected probably to rise after the Q2 2013 financial report, the current price might be a small window of opportunity to purchase FutureFuel shares before the stock continues its upward ascent. Our argument makes a largely fundamental case for suggesting whether these days FF's stock is a smart bet for your future profits.
FutureFuel is s a leading U.S. manufacturer of premium biofuels and organic chemicals. A mix of different factors plays a great role in efficiently producing biodiesel. With annual capacity soared by almost 70%, from 35 million gallons in 2011 to 59 million gallons today, FutureFuel bets largely on its location. As the company's two biorefineries don't have a nationwide infrastructure, FutureFuel is entirely dependent on rail and barge access. Despite on the company's successful performance, FF's relatively small operations indeed may cease to exist given changes in feedstock prices, government mandates, and tax credits.
The chart above shows the analysts' predictions for future FutureFuel's performance versus the company's recent results.
Based on the expected improvement in financials, the future potential of FF can set the yield-hungry investors for delight. However, where do reasons for the expected strong performance of FF come from?
Stock Valuation Model
Before reaching any prudent conclusion, let's analyze key statistics for FutureFuel. Here I'm going to use the "Stock Valuation Model" to find out whether FF stock is a right bet for your future profits. So let's all take a deep breath and walk step by step in order to make informed and sensible investment decision.
The stock valuation model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock.
1- Value Test
The bars below the metric indicate which value test components the company falls when compared to the whole market. For example, if a stock has 4 bars colored for Earnings Yield, the company's earnings yield is between 60% and 80% in the market.
Data from YCharts on 6 August, 2013
We can see that FF has a pretty good value score (9/10). It is likely selling at a low price given its performance. If the future looks like the past, this stock has promise and might become a profitable bargain in the future.
2 - Fundamentals Test
Fundamentals test allow us to look at the company's business at the fundamental financial level. This type of analysis examines key ratios of a company to determine its financial health and gives you an idea of the value its stock. In addition, the fundamental analysis helps investors expose positive and negative factors. Let's look closely if FF fails any of ten tests shown below.
Based on data from YCharts on 2 August, 2013
MCRS currently has a superior fundamental score (10/10). Apparently, the company looks strong. There are no obvious red flags; hence, that does imply zero risk - a good sign for investors.
3 - PE Valuation Method
This valuation method corrects for any recent price appreciations for discounts by suggesting that the value of the company will be in line with its historical valuations based on PE ratios. It will indicate companies that have recently increased in price, without an accompanying increase in earnings, to be overvalued, and it will show companies with a recent decrease in price, without an accompanying decrease in earnings, to be undervalued.
Formula: Value = PE5 x EPSTTM
PE5 = The 5 year historical average of annual median P/E ratios, allowed a maximum value of 35
EPSTTM = The trailing 12 months of earnings per share
PE Method Valuation = $14.70
Based on FF's financial data taken from Ycharts, calculation of the company's value according to PE Valuation Method makes us suggest that a current fair value for FutureFuel stands at $14.70.
4 - PS Valuation Method
The PS Valuation technique estimates stocks by applying a historical average of median Price to Sales Ratios to current trailing 12 months sales numbers. Investors should always check to ensure that they are comfortable with the estimated historical Price to Sales Ratio given information today before investing based on this valuation.
Many investors prefer to use sales numbers to estimate stocks since they are slightly more difficult than earnings to correct using accounting practices. This technique tends to overvalue companies (growth firms) that have historically traded at very high PS ratios, and tends to undervalue companies that historically traded at low PS ratios.
In order to help investors avoid unreasonable valuations, there is a set of maximum Price to Sales multiple at 10, even if the company historically has traded at higher values. If the intelligent investor has good reason to apply a higher multiple, they may choose to do so, but we will not publish numbers that high because they are rarely sustained.
Formula: Value = Price/Sales3yr x SalesTTM
Price/Sales3yr = 3 year historical average of annual median Price/Sales Ratios, maximum of 10
SalesTTM = The trailing twelve month sales per share
PS Method Valuation = $12.28
Based on FF's financial data taken from Ycharts, calculation of the company's value according to PS Valuation Method makes us suggest that a current fair value for FutureFuel stands at $12.28.
5 - Valuation based on Historical Multiples
The valuation based on historical multiples calculates the average of PE Valuation Method and PS Valuation Method. Since the method is an average, it will tend to be less volatile than either of the individual valuation methods. As a result, it would be helpful to check the values given by each of the methods discussed above.
Formula: Valuation (Historical Mult.) = (PE Valuation + PS Valuation)/2
Valuation (Historical Mult.) = ($14.70 + $12.28)/2 = $13.49
We can find out that currently priced at $16.06, FF's stock is 19 % over its historical valuation.
Expectations for Future
FutureFuel's business philosophy includes continuation of specialty contracts, increased production of performance chemicals and biodiesel. Biodiesel contributed to the company's revenue by more than 50% and there is potential for further increases in 2013 due to the global focus on finding alternative fuels and greater efficiency from vehicles.
The petroleum industry will see an uphill battle to block the use of higher blend of ethanol after the court's rejection of the ethanol mandate challenged to the US Environmental Protection Agency. It means in the next few years, more drivers will have to fill up with E15 gasoline.
In addition, Vice Admiral Dennis V. McGinn (USN, ret.), President and CEO of the American Council on Renewable Energy, recently said the following:
"From the economic damages of extreme weather fueled by climate change to the high costs of water and air pollution when petroleum is spilled or burned, we are paying the price every day for our reliance on oil. Alternatives like renewable fuel offer consumers a choice, bringing down prices for individual and businesses and ensuring all of us a cleaner, more sustainable future".
Moreover, these days Americans want less oil and more renewable fuel. For example, four in five respondents said they want the nation to be using more renewable fuel. This trend extends to personal choices and options: three in four said they want more renewable fuel options at gas stations.
The above-mentioned results of fundamental analysis suggest the following: at a price of $16, FutureFuel's stock looks a bit overvalued. Fair stock price valuation indicates that currently overvalued FF stock has at least 19% premium over its fair value. However, I would advise investors to jump into this golden boat before the boat has sailed.
Indeed, the company has strong financial health and there are no obvious red flags that could imply any risk for investment. Having a look at prospects in the renewable fuel industry, we can see FutureFuel's potential for growth in the near future. However, after adding FutureFuel stock in their portfolios, shareholders should track recent developments that cause the market to be optimistic.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.