Looking for another way to play the commodity boom? With volatility in commodities increasing, users and producers of products that use them are looking for a way to manage costs.
Enter FCStone (FCSX). Stone provide risk management consulting services to commodity wholesalers, end users, producers and offer customers clearing and execution services on all major domestic and international futures exchanges. Essentially, they enable companies to hedge against commodity price fluctuations and enhance their margins. Customers range from ethanol producers to sellers of heating oil but currently most of its customers are in agricultural grain business and they do business in the U.S., Canada, China, Brazil and Ireland
With the increase in commodity volatility, clients are entering into more transactions with FCStone, which went public March 16. In the second quarter, earnings climbed 78% to 41 cents a share and revenue rose 50% to $403.5 million. In 2006, earning more than doubled 2005's.
How does it work?
Say a company produces ethanol and wants to hedge against the price fluctuations in corn (currently the fastest growing segment). No,w these will be one of the hundreds the small local producers as the big ones, like ADM (NYSE:ADM), The Andersons (NASDAQ:ANDE) and Pacific Ethanol (NASDAQ:PEIX) will have in house operations.
"If it's a natural-gas-fired ethanol plant, we'd look to lock in a processing margin," said FCStone's treasurer Bill Dunaway. "We would enter into a financial derivative contract to lock in the price they'll pay for corn in the future and lock in the price of natural gas they'll need to purchase in the future to run the plant."
FCStone would also put in place a financial derivative to hedge the price of the ethanol that will be produced by the plant in the future. In so doing, it would lock in the price of the "inputs and the output, therefore securing a processing margin," he added.
What to expect?
Analysts polled by Thomson Financial expect earnings for the 2007 fiscal year, ended in August, to rise 77% to $1.59 from the prior year, then 11% in 2008. By now means is this a value stock. But, for a momentum play, they are in a great market at the right time for it's business. Also, if you expect consolidation in the Ag business, a fast grower like this could get swallowed up.
At these prices it is more of a momentum play than a ValuePlay, but, that does not mean you cannot make money with it.
Disclosure: Author has no position in FCSX