FutureFuel (NYSE:FF) is a manufacturer of diversified chemical products, biofuels and biobased specialty chemical products. They are a small cap stock with a market cap of $574.65M on sales of $396.9M in the trailing twelve months. As such, I think FF would make a great speculative play with a tremendous upside potential and a strong dividend providing a floor to recent downward pressure.
The last two earnings reports have hit FF hard, bringing it to more than 40% below the 52-week high based on the September 16, 2014 close of $13.14. The consensus target price is $20.00, representing an increase of 34%. Other interesting metrics in FF's favor include a PEG of 0.93, a dividend yield of 3.64%, and estimated earnings growth in the next year of 40.5%. The P/E ratio of 10.72 and forward P/E of 12.67 show that FF is generally not over-priced compared to the overall market. Additionally, FF carries no debt on their books and have a quick ratio of 5.00 and a current ratio of 6.5, indicating overall financial strength. The analyst mean recommendation score for FF is a very strong 2.0, and Insider and Institutional transactions are both positive in the most recent quarter.
FF has had a terrible time of it in 2014 thus far, down over 14% for the year so far and 21% over the last 52 weeks. The peaks for the share price came, first in March on a massive profit jump, and then again in May on the lead up to the first of the last two disappointing quarterly results. The most recent quarterly results, released on August 7, showed significant declines in both sales and earnings compared to the same quarters last year. Sales dropped almost 36% and earnings more than 70% compared to Q2 2013. The absence of both the 2014 final renewable fuel mandate from the government and the federal $1.00 per gallon blenders' credit were credited for the declines in demand. Because the US Congress has not enacted legislation to extend the blender's credit, the cost of producing biodiesel has increased and profit margins have been seriously impacted.
Two additional risks for FF come in the form of their two biggest customers. Procter & Gamble (NYSE:PG) is the sole purchaser of FF's bleach activator product, which represented 13% of company sales in 2013. The loss of PG as a customer would have a severely adverse effect of FF. The current purchasing agreement with PG has been extended to December 31, 2016. Despite this, revenues for the bleach activator decreased 7% in 2013 and FF reported in August additional declines of sales in their chemical business, including reduced volume of the bleach activator.
The second, unnamed, customer accounted for 48% of biofuel revenues and 30% of total revenues in 2013. This relationship has continued in 2014, but there is the risk that this could come to an end, which would have a dramatic effect on FF's fortunes.
The biodiesel and specialty chemical industries are highly competitive, not only in the sale and application of the final products, but in the procurement of the various chemicals and ingredients necessary to make FF's varied product line.
While the metrics indicate that the pressure FF has been under for the last four months has pushed them into an ideal purchase zone, the risk of losing one of either of FF's biggest customers keeps any investment in FF from here strictly in the speculative zone. The loss of the government supports to the biodiesel industry have had a significant impact on sales and earnings comps, and there is the risk that foreign competition may enjoy government subsidies that make their export to the US profitable and take market share from FF. Already FF has seen the loss of Europe as an export market due to anti-dumping and countervailing duties imposed in 2009 and extended through the end of 2014. Should other markets be lost in similar fashion, or due to external events, this could be a significant risk for FF as well.
Overall I believe that if the share price of FF does sink below the 52 week low of 13.01 that the dividend and low payout percentage of 38% make FF a good speculative long-term investment. There is certainly the possibility that biodiesel credits could be a part of a future energy or jobs initiative, and the bumper harvest this year in the Midwest has allayed fears some have had of inflation of food prices due to increased diversion of corn to biofuels.
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