Flexible Solutions International Inc. (FSI) is a company within the chemical manufacturing sector that focuses on developing chemicals and products that provide a means for slowing down the evaporation of water as well as providing alternative methods for conservation. Below in Figure 1, it is apparent that FSI experienced a significant decline in market value from the start of 2012. On top of that, volume traded throughout the months of June to August was very stagnant. However, FSI's fundamentals are still there and with increases in volume traded along with external factors veering off the radar, this only increases the probability of an upward trend. This article provides a detailed breakdown of FSI's products, revenues, and historical performance. Then shifts its focus to some of the macroeconomic and environmental factors that have been shaping the industry in which FSI operates. Last, it will cover some of the risk metrics incorporated within FSI's holding period returns in contrast to how they stand against the S&P 500.
Figure 1: FSI YTD Price Graph
Here is brief overview of FSI's business model:
"FSI and its subsidiaries develops, manufactures and markets specialty chemicals, which slow down the evaporation of water. In addition to the water conservation products, the Company also manufactures and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers (TPAs). TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries. It operates through two wholly owned subsidiaries: Flexible Solutions Ltd. and NanoChem Solutions Inc." Business Description from Google Finance
Product & Revenue Breakdown
FSI's product line can be categorized into two types: Energy and Water Conservation Products and Tri-Polymer-Alloy Products. The line of EWC products include: Heat$aver, Water$aver, and Eco$aver, all of which are directly manufactured, marketed, and sold by FSI. The way these products work is after they are applied to the surface area of the body of water (such as a pool, hot tub, etc.) a thin layer is formed on the surface after applied, the layer slows the evaporation of water allowing the water to retain a higher temperature for a longer period of time, reducing the energy required to maintain the desired temperature of water. TPA products are manufactured through FSI's subsidiary NanoChem Solutions, Inc. These products include biodegradable polymers which are designed for petroleum, chemical, utility, and mining industries to prevent corrosion and scaling in water piping. For example, they are used for oil extraction in mining industries. TPA's are also widely used in agriculture for increasing crop yields by augmenting the fertilizer uptake.
Figure 2: Historical Revenue & EPS
Above in Figure 2, you will see that from 2010 to 2011 FSI experienced the greatest increase in sales that they have ever had, which brought them to positive earnings per share at 2011 YE.
Figure 3: Sales & Product Segmentation
As you will notice in Figure 3, the vast majority of their revenue is derived from their line of biodegradable products that are manufactured by their subsidiary. This is primarily because these products are more marketable to larger companies in bigger industries, and majority of the customers for the EWC products are general consumers. In total revenue for 2011 was approximately $15,520,000, and of this approximately 15 million dollars was from the US and other countries abroad. With the exception of Canada, which accounted for the remaining $520,000.
Historical Performance & Valuation
FSI is currently trading in the $1.30 to $1.40 range, with about 13.17 million shares outstanding they are sitting at a market cap of about 18.17 million dollars. Recently, FSI has been experiencing an upward trend and have shown signs of positive momentum in trading over the past two weeks. After establishing a strong four month support line right around the $1.20 range, thirty day RSI indications are at approximately 28.5, which in support of this positive upward momentum. As you can see below in Figure 4, FSI has been underperforming competitors and the S&P steadily since February, with a YTD return of about -38.66%. FSI's business model remains intact, however the drought Midwest has played a major role in affecting the agricultural industry, as well as outside companies that rely on the industry as a customer.
Figure 4: Peer & Benchmark Comparison
Figure 5: US Drought
According to national weather reports and an article called "Climate-Induced Hikes in Corn Prices Creating Agricultural Doom", the current drought we are experiencing throughout the Midwest is the worst drought the U.S. has experienced since 1956. As a result of this extreme drought, the U.S. Department of Agriculture has cut the 2012 forecast for corn, by approximately 12%. Given consideration to the fact that the Renewable Fuel Standard requires approximately 13 billion gallons of corn to be used in ethanol production, of the current level of corn estimated to be produced almost half of the corn will be used for fuel instead of a source for food. Farmers are experiencing losses, forced to sell their corn at a higher price to just break even. As you will see in Figure 6 below, the price per bushel of corn has sky rocketed since June.
Figure 6: Corn Prices
It is evident the drought is drastically having a negative effect on the market for corn. However, the fact that corn prices have increased significantly and the effect of the drought on farmers is associated with and can explain a decrease in demand for FSI's products by farmers. A significant portion of FSI's product line is sold to the agricultural industry which through the use of their product aims to increase their agriculture yields, however after experiencing such poor business through harsh climate changes as we have experienced is forcing them to cut back on expenditures.
How does FSI Compare to the S&P in Terms of Risk?
Figure 7: FSI vs S&P Risk Analysis
A few statistics derived from FSI's four year monthly holding period returns (incuding distributions). As you will notice over the past four years FSI yielded a higher return than the S&P 500 with an arithmetic average return of 2.79%, while the S&P yielded a slightly negative return. One noticeable difference is the level of risk. The S&P index held in isolation only has showed a standard deviation of 5.96%, relatively moderate given the 2008-2009 financial crisis. FSI on the other hand displayed relatively more risk with a standard deviation of 21.58%, also showing signs of skewedness and kurtosis in their returns as well.
FSI has strong fundamentals and engages in an industry that is cyclical in nature. External factors such as weather conditions nation wide have drastically affected FSI's sales growth. As I depicted before, in 2010 and from 2010 into 2011 sales grew immensely. FSI has the ability to turnover a profit and generate revenue. With stable support at the $1.20 range, appealing valuation, investing in this company is a short term play for the value investor, yet a long term play for the growth investor.
Sources: FinViz.com, Y-Charts.com, TDAmeritrade, The US Department of Agriculture, Google Finance, and Yahoo Finance.