Optimistic on FC Stone Group Despite Market/Earnings Volatility

Imagine a business where volatile markets and uncertain conditions drive profits and you have a picture of FC Stone Group’s (FCSX) playing field. The company, who was listed under the ticker FCSX in March of this year, offers risk management consulting and transaction services to companies involved in commodity production or consumption. The fiscal fourth quarter was completed at the end of August and the company capitalized on a very appealing environment. Earnings per share came in at 0.39 and revenue was up 43% over last year at $75.6 million. Management cited three primary areas of strength:

1. Higher volumes in exchange traded transactions due to volatility in grain and energy markets
2. Higher Over the Counter [OTC] volumes primarily in renewable fuels
3. Increased Foreign Exchange commissions and interest income

While US markets no doubt played a significant role in the success for Q4, the company is increasingly looking overseas for new customers. There are now four major international offices operating in Brazil, China, Canada and Ireland. While Brazil represents the company’s strongest holding in the production side of the coin, Chinese clients typically represent the lions share of the consumption side helping to balance out the opposing sides of the supply demand curve.

Grains have been especially volatile due in a large part to the renewable energy initiatives which have driven corn production to record levels. FC Stone has been able to capitalize on this exploding sector and currently is estimated to work with 40-50% of the ethanol producers. As the industry continues to grow, management believes it will be able to maintain current market share and could possibly even see that portion grow. This equates to significantly higher revenues from both a trading standpoint as well as from additional fees from consultants. As new clients come on board and existing clients build a stronger level of trust, an opportunity arises to cross sell different products. The company is seeing additional volume on foreign exchange as currency fluctuations affect more and more participants.

One of the concerns from the earnings release is that rates per contract [RPC] for futures transactions were significantly lower. However this concern was put to rest for the most part as management disclosed that they landed a few high volume trading clients which were given lower rates for their massive amount of business. BMO Capital speculates that the company may be able to land more of these type clients and while the lower RPC puts pressure on margins, the higher volume more than makes up for any dampening effect.

Another concern was the resignation of Bob Johnson who has been with the company for 20 years and currently serves as the CFO. It appears this is a natural passing of the baton to William Dunaway who currently serves as the Treasurer. Mr. Johnson will remain in an advisory role for the foreseeable future and Mr. Dunaway has experience and expertise that should provide a seamless transition over the next 3 months. At this point it truly looks like a positive move and one which will not disrupt the operations.

Since the fiscal first quarter is well on its way, management was able to comment that things were running smoothly and Q1 is expected to be another solid quarter. It appeared that there was some cautionary tones against reading too much into Q4’s strength and extrapolating a trend too far into the future. Still it appears management is optimistic that the current environment will continue to offer opportunity for growth and strength in the dynamic market in which FCSX serves.

Disclosure: Author has a long position in FCSX