Best stock to invest in – FutureFuel: Still Future, Less Fuel

Best stock to invest in

by Debra Fiakas CFA

The last post “From
Fuel to Fudge”
discussed how the old Solazyme developer of
algal-based renewable fuel has been transformed into a new company
called TerraVia, (TVIA)
which is pursing algal-based food and personal care products. 
Solazyme is not the only renewable fuel company to make an about
face.  Granted FutureFuel
NYSE) has not changed its name or stock symbol like Solazyme. 
However, its ability to produce specialty chemicals has given
FutureFuel an alternative to biofuels and its early plans to build a
plant that could eventually produce 160 million gallons of biodiesel
each year.

It took very little time from the company’s inception for FutureFuel
strategists to pull back the biodiesel plant to a 40 million gallon
name plate capacity.  Even as the company was getting started
in the 2006 and 2007 time frame, margins on biodiesel began to
shrink.  Management was worried.  The plant finally ended
up with a capacity to produce 58 million gallons of biofuels per

FutureFuel was already keeping the lights on by selling performance
chemicals.  As much as two-thirds of revenue in the early years
was generated by the sale of specialty chemicals, including a bleach
activator that was sold to a detergent manufacturer and a
proprietary herbicide for a life sciences company.  Biofuels
accounted for only about a quarter of revenue.  Fast forward to
the year 2015, biofuels are providing the majority of sales and
specialty chemicals have taken a back seat.  

Fact of the matter is sales of BOTH specialty chemicals and biofuels
have declined.  Biofuel sales peaked in the year 2013, but have
since declined on lower selling prices and volumes.  Specialty
chemicals sales peaked that year as well.  The herbicide
producer has stopped buying the herbicide additive and FutureFuel
has had to accept a lower selling price for its bleach activator in
order to keep its detergent manufacturer customer through the year

Rebuilding the specialty chemicals segment is a largely a matter of
finding new customers.  It is a situation over which the
company has some control.  It is a matter of marketing,
branding and messaging.  Then again it could be just a matter
of salesmanship and good old fashion shoe leather.  

Unfortunately, in its biofuel segment FutureFuel is experiencing
plenty of difficulties  –  none of which are so easily
resolved.  Protecting profit margins from costly feedstock is
just one of them.  FutureFuel appears to have little latitude
on feedstock even as other biodiesel and renewable diesel products
have found success. 

There are numerous biodiesel producers, some also using the
transesterification process that FutureFuel uses.  An
increasing number are using less expensive feedstock, such as waste
oils.  For example, Diamond Green Diesel,
the joint venture of Darling
NYSE) and Valero Energy
uses the waste oils that Darling collects
from meat processing plants and restaurants around the
country.  Diamond Green just announced plans to expand
production capacity.  Another 125 million gallon capacity will
be added by the end of 2017, bringing to total capacity to 275
million gallons per year.

Renewable Energy Group (REGI: 
Nasdaq) is also expanding storage capacity for both its waste oil
feedstocks as well as finished biodiesel at its Danville, Illinois
facility.  The storage capacity is pivotal in allowing REG the
flexibility of timing its sales at peak or at least better
pricing.  The ability to delay sales to wait for better prices
is one of the keys to building profits in the fuel production
industry.  REG now has 45 million in annual biodiesel
production and 12 million gallons in biodiesel storage capacity in
Danville.  This facility is only one of a dozen active
biorefineries REG has in operation around the country.

In the most recently reported twelve months FutureFuel delivered
$48.6 million in net income or $1.11 in earnings per share on $292.2
million in total sales.  The company remains profitable, but
comparisons to the previous twelve months are not favorable. Even in
the most recently reported quarter ending March 2016, the company
reported sales 10% lower than the previous year period. 
Earnings we well above expectations, but only because the company
benefited from reinstatement of the blenders tax credit.

FutureFuel has tried to break free from its biofuel origins, finding
new products and new customers.  It seems investors might be
doing the same.  After a brief recovery, the stock has sold
off, leaving FF priced at ten times expected earnings for the year
2016.  We note that the stock was nearly at the same value
about two years ago.

Debra Fiakas is the Managing
Director of
Crystal Equity
, an alternative
research resource on small capitalization companies in selected

Neither the author of the Small Cap
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.  Crystal Equity
Research has a buy rating on Darling Ingredients and a Hold
rating on FutureFuel.

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