Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
reported financial results for the second quarter ending June 2015. Sales of the company’s biodiesel and
specialty chemical products increased 53.7% to $104.6 million compared to the
prior-year quarter when reported revenue was $68.0 million.The company delivered a profit as usual, but
traders appeared unimpressed.The stock
gapped lower on the news and two days later set a new 52-week low price.Granted net income was lower year-over-year
by 30.9%, coming in at $3.8 million or $0.09 per share. A closer look at the sales mix reveals what
has FutureFuel shareholders gnawing their nails.
Sales of the
company’s various chemical products were essentially flat in the June quarter
after registering a 13.0% leg higher year-over-year in the March quarter.The June quarter plateau should not have come
as a surprise given that the chemicals segment has been erratic at best,
shrinking in 2013 after registering weak growth in 2012.
products include an diverse mix of herbicides, industrial formulas and a bleach
activator.Historically, the bleach
activator has been FutureFuel’s bread winner, responsible for 15% to 20% of
total sales over the last few years.In
the June quarter sales of this product dropped to just 6% of total sales.The bleach activator is used in powdered
laundry detergents, which have lost market share to liquid detergents in recent
years. FutureFuel’s primary customer for
this product is terminating its order arrangement by the end of 2015.Management has claimed negotiations are still
underway, but if sales in the June quarter are any indication, a new supply
agreement is not likely.
Orders for other
chemicals helped make up the short-fall in bleach activator revenue.Sales
volume of proprietary herbicides doubled in the June quarter compared to the
same quarter last year.However, revenue
increased only 75%, which the company attributed to ‘product mix.’Apparently, certain contributors to the
elevated volumes were lower priced items.Revenue also increased 25% for intermediate chemicals used in the
production of antimicrobial solutions and other custom chemicals.As encouraging as these revenue pick-ups
might be, the loss of a major customer for a principle product is certainly a ‘fret’
worthy turn in events.
This brings us
to the biofuels segment, which contributed $71.9 million in total sales to the
June quarter, representing 3.6 times biofuel revenue in the previous quarter
and 2.0 times revenue the year-ago period.Increased sales through common carrier pipelines offset volume declines
in the June quarter.The revenue accomplishment
should have shareholders squat jumping high-fives!Unfortunately, profits in the biofuel segment
were nothing to celebrate.
reported a gross profit margin of 10.2% in the biofuel segment in the year
2014, and the profit margin increased to 12.3% in the first quarter this
year.However, in the June quarter
pricing pressures got the best of FutureFuel, gobbling up profits and leaving
the company with a profit margin of negative 6.2%.In other words, it cost FutureFuel more to
produce its biofuel products than it recorded in sales.Management cited erosion in selling prices
for transportation fuel and uncertainly in U.S. regulatory mandates for
Few if any
analysts or economists are predicting a near-term recovery in crude oil
prices.What is more, in the lead up to
elections no one should hold their breath waiting for Congress to set policy on
much of anything let alone renewable fuels standards.Thus it seems shareholders could expect more
of the same volume and profit dynamic in coming quarters for FutureFuel’s
biofuel segment.This is definitely
something to fret about.
Top-line stress is
probably not the only factor sending FutureFuel shares into free fall.Operating cash flow reveals more reasons for FutureFuel
shareholders to worry.The company
generated $41.1 million in operating cash in the first three months of 2015.However, in the June quarter FutureFuel
actually used $6.2 million of its cash resources to support operations.This is not a positive turn of circumstances.While the company saved some cash by drawing
down inventory by $8.5 million in the quarter, approximately $7.2 million in reported
sales got bogged down in accounts receivable.Another $7.9 million in cash was lodged during the quarter in an income
tax receivable.The company also paid
down accounts receivable by $980,000.
The ebb and flow
of working capital accounts only creates temporary cash flow problems.For FutureFuel it is really the quality of
earnings that should worry shareholders.The company reported $3.8 million in net income in the quarter, but a
total of $1.8 million or 47% came from a mix of non-operating sources:$627,000 came from a deferred income tax
benefit, $770,000 from increased value in marketable securities, and $450,000
from the sale of investments.
traded to a record low for the year, taking the price to an enticing 7.8 times
trailing earnings.The dividend yield is
a very interesting 2.4% at the current price.With $142.0 million in cash and another $85.9 million in marketable
securities on the balance sheet, the company appears capable of withstanding a
few more quarters of negative operating cash flows before the dividend would
come under scrutiny.
with a long-term time horizon, the dividend yield could be a good reason to
fret less about the last quarter and look more carefully at the company on the
basis of annual sales, profit margins and cash flows.The temporary influences that make the
quarter results look exceptionally good or bad get smoothed out.The erosion in profit margins cannot be
escaped by looking at full-year comparisons, but a dividend check helps make
worthwhile the wait for resumption in sales growth.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.