CAPScall of the Week: FutureFuel

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.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at biofuel and chemicals manufacturer FutureFuel (NYSE: FF  ) .

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:

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Dividend Yield

FutureFuel 1.5 8.2 10.1 4.0%
DuPont 5.2 10.6 11.2 3.1%
Archer Daniels Midland 1.1 4.3 10.2 2.3%
Eastman Chemical 4 12.3 9.5 1.9%
Celanese 5.2 11.2 9.2 0.5%

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.

The call
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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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2012, at 4:32 PM, feynmanshomeboy wrote:

    Readers will benefit from your spotlight on FF, UltraLong.

    My thoughts as of about a year ago are in the commentary for FF.

    I'll add to your description that I disagree that the $1/gal. blender's credit will be renewed. However, the combined renewable fuels id number (RIN) credit is currently close to the combined value of the RIN in 2010 and the blender's credit. In other words, the total subsidy has not fallen even though the blender's credit does not exist anymore. The RIN is a product of the EPA's mandated volumes for biodiesel. This mandate extends for a decade to come and has recently been adjusted upwards from their earlier forecasts.

    I'm also excited about FF because they're going to recognize their first revenue on their lithium battery project in the just finished quarter. I'm eager to see how large of a project this is.

    Lastly, FF has $150MM of cash and marketable securities and no debt. For a $400MM market cap, that's a large treasure chest. They have a very efficient return on invested capital for a chemical company.

    Long in FF.

  • Report this Comment On July 29, 2012, at 6:51 PM, FormerFF wrote:

    I wish I had read this on May 1. But I was probably working a 10+ hour day that day trying to get ready for the layoff that would occur the next day at FutureFuel (always one to finish my work).

    The site is the best place to work in the world, staffed by the finest team of ~500 people in the world, and I miss it every day. If the equipment is on hand to make it, or can be found to make it, it will be made safely, in an environmentally sound way, and cost-effectively. Businessmen, bring your business to FutureFuel.

    You may say that the following comment is because I resent being laid off. Not so. I have defended the owner to former co-workers on several occasions. It is his company, his his rules, and he should be able to make the choices. But I believe that short sighted decisions are being made for quick profit from the site rather than taking a longer term view of the needs of the site over time. Such is business in the United States. Help the company survive. I'd like my friends to stay employed.

  • Report this Comment On March 12, 2013, at 1:25 AM, DrGoldin wrote:

    @FormerFF: Could you elaborate?

  • Report this Comment On May 08, 2014, at 7:26 PM, jargonific wrote:

    The company's May 8, 2014 earnings were problematical. Came in short at 3 cents below estimates. This apparently due to end of a subsidy.

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