Clayton, Missouri-based FutureFuel Corporation (FF), through its subsidiaries, manufactures and sells various chemical products, bio-based products (including bio-based specialty chemical products) in the United States. The business operates in two segments: Chemicals and Biofuels. The chemicals segment includes custom chemicals, agro chemicals, additives for detergents, biocides agents, specialist polymers, dyes, stabilizers, and chemicals agents (which are the chemicals used in cosmetics and personal care products), and specialist products used in the fuels industry.
What initially caught my attention on this particular stock is the way in which it has performed over the past couple of days, with significant price spikes backed by strong volume. What is more intriguing is the fact that this recent movement has come after the Q1 earnings announcement last Thursday, when the stock actually moved down on selling the news (May 10th):
May 09th: Closed at $11.82 on volume of 38.5k
May 10th: Closed at $11.48 on volume of 84.5k
May 11th: Closed at $11.55 on volume of 42.2k
May 14th: Closed at $11.90 on volume of 144.9k
May 15th: Closed at $12.70 on volume of 140.0k
Post earnings last Thursday, the stock dropped down to around $11.44 with a small spike in volume. At the time, in my view (although impossible to confirm), this was most likely down to large hands buying up shares from the post-earnings sellers expecting further dips.
It is the following 2-3 days of price and volume activity in this stock, which provides the strongest evidence that large hands have been actively moving into this stock. The average volume in this stock over the past 90 days sits at around 65k/day. The last two days have seen relative volume multiples hit 2.15 times and 2.22 times the average. This is strong accumulation, which is always an initial prompt for me to at least look into this company.
At the current price, the stock still has plenty of room to grow, and I am expecting this one to at least hit the first strong resistance at 13.50, purely ion a technical basis (backed by recent strong volume accumulation) before consolidating and moving higher. The chart above also shows what is potentially a bottom, with multiple supports at around 11.50 since April.
From last Thursday’s Q1 report, revenues were $55.7 million, up 3.0% from $54.1 million; excluding the impact of the blenders tax credit (BTC), revenues were $69.3 million, up 28.1%. Adjusted EBITDA was $37.6 million, up from $5.6 million; excluding the benefit of the BTC, adjusted EBITDA was $8.7 million, up 55.4%. Bottom line, the net income increased to $40.4 million, or $0.92 per diluted share, from $3.4 million, or $0.08 per diluted share, significantly benefited by the BTC.
The BTC, or Blenders Tax Credit, is a biodiesel blender that is registered with the IRS, eligible for a tax incentive of $1/gallon of pure biodiesel, agri-biodiesel, or renewable diesel blended with petroleum diesel to produce a mixture containing at least 0.1% diesel fuel. FutureFuel qualifies for this, and it adds a sustainable $1 per gallon tax credit to the bottom line. This is likely to continue for the foreseeable future. If established (as it is likely to do so) over a longer term, the company valuation remains presently discounted.
However, what matters beyond the transient politics of the BTC are the increased production and sales volumes within both the chemical and biofuel segments, reflected in top line revenues and gross profit growth.
Beyond the mainstream numbers, the company has the following key metrics in its favor:
Cash and Equivalents of $232.57m represent a large proportion (42%) of market cap ($555.52m). Cash and Equivalents of $232.57m represent a large proportion (42%) of enterprise value ($322.95m). The company has zero debt on its balance sheet (Total Debt reported last quarter). All other credentials pass within our screener, notably: Operating Income to Enterprise Value is 12.69% (meets minimum 4%) Free Cash Flow to Enterprise Value is 6.59% (meets minimum 4%) Debt to Equity is Zero (meets maximum 50%) Debt to Capital is Zero (meets maximum 50%)
With fundamentals intact there is not a lot of negative counterbalance to report on FF at present – suffice it to say, price and volume activity from the recent bottom of around $11.50 seem to be pointing to strong accumulation, backed by both price and strong multiple relative-volume activity.
My thesis is largely based on strong accumulation which is continuing this week. The volumes traded in the stock are above average. FF stock was purchased by a variety of institutional investors in the last quarter, including Dimensional Fund Advisors LP, Millennium Management LLC, Matarin Capital Management LLC, BlackRock Inc., GSA Capital Partners LLP, Personal Resources Investment & Strategic Management Inc., Element Capital Management LLC and Citadel Advisors LLC. Company insiders that have bought FutureFuel stock in the last two years include Donald C Bedell, Keith Neumeyer and Samir Devendra Patel. (Source: MarketBeat).
FutureFuel is a diversified company with many sub-divisions servicing distinct markets under the one umbrella of chemicals and biofuels. It is still small (and nimble), in a potential growth sector through more diversification, especially within the chemicals segment, for which FF enjoys more established markets. The company has had a turnaround in demonstrating one of the strongest FCF/EV yields I have seen in some time. This is in my opinion, a significantly undervalued, speculative (higher-risk-capital) bet.
Disclosure: I am/we are long FF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.