For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
What FutureFuel does
As a company valued at $420 million, and with daily trading volumes of just 31,400 shares, FutureFuel isn't the first name that springs to mind when investors think about biofuels or specialty chemicals. DuPont (NYSE: DD ) , the king of chemicals, or Archer Daniels Midland (NYSE: ADM ) and its dual biofuel/chemical products are the names most people associate with this sector. My advice would be to learn the name FutureFuel and understand that it essentially focuses on three main businesses: biofuels, specialty chemicals aimed at custom manufacturing, and specialty chemicals aimed at performance.
Whom it competes against
Because FutureFuel has its fingers in so many aspects of the chemicals business, it faces competition from the previously mentioned DuPont and ADM, as well as Eastman Chemical (NYSE: EMN ) , and Celanese (NYSE: CE ) in performance chemicals, just to name a few. Going up against these huge budgets isn't an easy thing, but FutureFuel has managed to hold its own:
Price/ Cash Flow
|Archer Daniels Midland||1.1||4.3||10.2||2.3%|
Source: Morningstar, Note: Yields are projected.
A few important notes immediately come to mind about the figures above. First, ADM and FutureFuel are the cheapest on a price-to-book basis, which has a lot to do with their reliance on government subsidies to drive growth. ADM is reliant on ethanol subsidies to spur its growth while FutureFuel's biofuels business depends on the currently expired $1-per-gallon federal fuel blenders' tax credit to drive profits.
It's also worth noting that despite the enormous cash flow present in the four much larger chemical companies, it's FutureFuel with its $0.10 quarterly stipend that delivers the best bang for your buck at a 4% yield. Celanese, for instance, pays out only a 0.5% yield, and it took a good five years before the company was willing to boost its quarterly dividend by $0.01! Overall, FutureFuel offers the best value/growth/income proposition of this grouping, in my opinion.
After reviewing FutureFuel's prospects, I have (for a third consecutive week) chosen to make a CAPScall of outperform on the company. I feel FutureFuel offers investors a perfect balance of growth and stability with its biofuels and chemicals segments.
The biofuel/biodiesel movement is in its infancy, and it's in the U.S. government's best interests, regardless of which party wins the 2012 presidency, to continue to promote alternative forms of fuel. I fully expect that the $1-per-gallon tax credit for biodiesel will be making a comeback shortly and that the downside reaction in the stock because of its expiration is largely overdone.
FutureFuel's chemical businesses will ebb and flow with the economy, but overall provide relatively stable cash flow to the bottom line. Its chemical products are supplied to businesses ranging from detergent manufacturers to life science companies. In short, profitability and growth should continue and its dividend appears safe for the foreseeable future.
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- Add FutureFuel to My Watchlist.