FutureFuel - A Worthwhile Investment

| About: FutureFuel Corp. (FF)

Summary

FF is a chemical company which also makes biodiesel.

FF has nearly $250 million in balance sheet cash with no debt or $5.66 net cash per share.

FF's biodiesel business will benefit from the retroactive renewal of the $1.00 per gallon tax credit for biodiesel.

FF had run into a headwind with the loss of business from a large customer for a bleach activator - that problem seems to be resolved with a contract extension.

FF's current pricing doesn't reflect the significant benefit of these two important positive developments.

FutureFuel (NYSE:FF) is a chemical company which has an extremely strong balance sheet. FF closed Monday at $11.79 a share and pays a very secure dividend of 24 cents a share for a dividend yield of a bit more than 2 percent. FF has no debt and has cash and marketable securities totaling $247.4 million or $5.66 a share. I first noticed FF roughly a year ago when it showed up on a value stock screener. I wrote this article about it at the time. At that time, FF had balance sheet cash of $4.66; the year over year increase is primarily due to the transformation of inventory and accounts receivable into cash.

Based on 9 months of data, 2015 earnings (depressed by low energy prices) should be roughly 51 cents per share and owner cash flow (earnings plus depreciation and amortization minus capital expenditures) should be 56 cents per share. Given its huge amount of balance sheet cash, FF's enterprise value is only $6.23 so that it trades at an Enterprise Value/Earnings ratio of roughly 12. While earnings have declined, given its exposure to energy prices (due to its biodiesel business) it appears to be doing comparatively well. Two very important recent developments should improve earnings in 2106.

Chemical Business - FF has two main businesses. The first is chemical production. FF produces customized specialty chemicals, herbicide intermediaries, and a chemical which serves as a bleach activator used in detergents. One big problem for FF in the past year has been the fact that its customer for the bleach activator - Procter & Gamble (NYSE:PG) appeared to be ending its relationship with FF. The first major recent positive development is that, in October, it was announced that PG has extended its contract with FF through 2018 and will continue to take the product. This has removed one large cloud over FF's head. In addition, the new contract with PG appears to allow FF to market the product to other customers.

Biodiesel Business - On the biodiesel side, declines in energy prices have undermined this business. In addition, during most of 2015 biodiesel producers continued producing and pricing biodiesel based on an assumption that the $1.00 per gallon tax credit would be renewed but, on the other hand, did not benefit from the actual availability of the tax credit. The second very important piece of good news is that, late in 2015, Congress decided to renew the biodiesel tax credit of $1.00 per gallon through the end of 2016 and to make the renewal retroactive to cover 2015. This is good news for FF for 2 reasons. First of all, the tax credit will greatly improve the profitability of biodiesel during 2016 and should produce higher prices. Secondly, the retroactive nature of the credit may allow FF to achieve a one-time windfall in terms of generating credits for biodiesel sold in 2015. In statements made during FF's most recent earnings call, it appears that - in contracts with customers - FF preserved its right to the tax credit for volumes sold during 2015. FF has not revealed exactly how large this benefit from the retroactive application of the tax credit will be, but the indication on the call that FF preserved its right to the credit in contracts with customers suggests the potential for a significant one-time economic benefit. My take on the situation is that there will be a substantial one-time benefit falling in either the fourth quarter of 2015 or the first quarter of 2016.

Conclusion - For a company of its size, FF has an enormous mountain of balance sheet cash. In the conference call, FF also noted that it is exploring acquisition opportunities which - given its balance sheet cash - are obviously open to it. FF is now trading at a low Enterprise Value to Cash Flow ratio and its valuation does not reflect the two important positive developments noted in this article. At an uncertain time like this, FF's extremely strong balance sheet is a key asset and may enable it to buy adjacent businesses on the cheap. At this price level, I am enthusiastically long on FF.

Disclosure: I am/we are long FF, PG.

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.