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A jumble of renewable energy companies crowded into the stock market over the past few years. But after their IPOs? They. All. Flopped.
No one likes seeing a portfolio full of red, but despite their initial drops, the future might be burning bright for some renewable energy companies -- which could set the stage for a great Foolish opportunity.
Better than the rest?
In trying to carve out a place in the market, each of these companies has employed interesting methods to create fuel from natural products. As investors, we need to figure out which companies can leverage their technologies into lasting returns.
FutureFuel (NYSE: FF ) is a bright spot in this industry, since it's one of the only companies in this group that actually generated income in the past five years. (Renewable Energy Group (Nasdaq: REGI ) has also posted positive net income since 2010.) The diversity of FutureFuel's products creates a significant advantage for the company.
Its chemical segment manufactures custom compounds that in turn become ingredients for a variety of final products such as detergent, herbicide, and personal care products. Strong partnerships with Procter & Gamble and Arysta LifeScience drive a significant proportion of the chemical segment's revenues.
Another division works in biofuels, participating in the production and transport of different biodiesels. FutureFuel has redesigned its production facilities to produce biodiesel from lower-cost inputs, making the company more prepared to adapt to changes in the energy industry.
Increasing revenue, growing margins, and no debt all mean that FutureFuel is doing something right in managing its capital. With the extra cash the company has generated, it's even rewarding shareholders with a 4% dividend yield!
What to watch out for
Across the biofuel industry, prices for feedstock -- the natural products like corn and inedible oils that are needed to produce the fuel -- powerfully influence input costs. Additionally, government regulations have simulated demand for alternative fuels. This can be great if the laws don't change, but I would hesitate to bet on the stability of any political party's future policies. Procter & Gamble decreased its chemicals order for a specialized bleach activator from FutureFuel, which caused sales of the product to decline 19% compared to the three months over the previous year.
However, FutureFuel is not naive to the risks of the industry. It has positioned itself to benefit regardless of any climate changes that could decrease the availability of inputs, or alterations to the political landscape. The company doesn't depend on one supplier or product to create fuel, which allows it to be flexible and adapt to worldwide changes that could crush competitors with a more singular focus. FutureFuel has demonstrated additional foresight by building storage facilities to store up feedstock when prices are favorable.
Competitors are eating FutureFuel's fumes as they try to obtain some profits in this cyclical industry. Solazyme (Nasdaq: SZYM ) is using algae to develop oils to substitute conventional fuels. However, with research costs increasing, the company has not realized any income, leaving investors skeptical of its ability to turn a profit in the future.
Other players in the renewable energy field lack FutureFuel's financial success to date. For example, Amyris (Nasdaq: AMRS ) has not been able to break even, which has not encouraged much investor confidence in its future. Amyris uses yeast to create petroleum replacements, but it needs to scale its production to achieve the success it hopes for in commercial sales. It is difficult to tell at this point whether or not the company will have the ability to operate on a larger scale, because Amyris has recently stumbled in attempts to grow its production capacity. Compare that to FutureFuel, whose recently redesigned biofuels production line has helped boost its output.
FutureFuel is ready to adapt to the risks of energy and to benefit no matter how renewable fuel changes in the years to come. With no debt and a steady growth trajectory, the company could really live up to its name -- and provide valuable upside for early investors.
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