Tuesday, January 19, 2016
Flexibility Key for Flexible Solutions
Last week Flexible Solutions International, Inc. (FSI: NYSE) reviewed financial results for its fiscal year ending December 2015. Apparently, it was not a banner year for this producer of biodegradable polymers, including ingredients for oil extraction, detergents and water treatment. Most of its customers are in the oil and gas industry, which is experiencing a particularly deep downturn. A flooding situation in Texas led to a reduction in demand for the company’s WaterSavr product. Consequently, the company indicates that sales in 2015 were near $15.9 million, which is flat compared the previous fiscal year.
Investors will not get a look at the details until the end of March 2016, when Flexible Solutions files its annual report with the SEC. In the meantime, we have results for the first nine months of 2015. The company has reported $12.2 million in total sales in the first nine months of 2015, compared to $12.0 million in the same period in the previous year. Investors might not have been thrilled with the tepid top-line performance, but a strong increase in net income to $1.1 million or $0.08 had been impressive against the reported $421,403 or $0.03 in the previous year.
With this trend etched in investors’ minds, it is understandable why Flexible Solutions management wanted to come clean on slipping sales as soon as possible. In the announcement last week the company disclosed that sales declined 6% year-over-year in the quarter ending December 2015. Shareholders will be on pins and needles for the next two months wondering if the slip in sales also means a slip in profits.
Flexible Solution has not been sitting by idly waiting for it primary oil and gas target market to recover. The company has clocked in increased sales of its biodegradable polymers (BCPAs) to alternative markets such as agriculture and industry. Farmers can use the BCPAs to enhance fertilizer uptake by crop plants. The company’s BCPAs can also be used to make detergents biodegradable. Consequently, sales of BCPAs in the first nine months of 2015 increased 3.3% year-over-year. It was actually weak sales of water conservation products that have been the source of disappointment, declining by 19.3% in the first nine months of 2015 compared to the same period the year before.
Management has also shown its ‘flexibility’ through a cost reduction program. Suspension of operations at the company’s aspartic acid plant in Taber, Canada and a move to more modest headquarters helped trim operating costs. The company had been planning to produce its own aspartic acid production using a sugar-based process. The economics of this choice have been in flux as production costs in Canada increased while aspartic acid prices from historic suppliers in China have declined.
Investors will need to be as flexible as management. The stock had been on a steady climb since late October 2015, on relatively encouraging fundamental news reach investors. However, last week as news of the top-line disappointment reached traders, FSI price sold off on above average volume. On the final day of trading last week, FSI fell below the 50-day moving average stock price.
Contrarian investors, who believe FSI is now oversold, but find this a compelling opportunity to accumulate shares. Unfortunately, it might be a long wait to recovery. It is unclear whether the U.S. equity market as achieved full capitulation. There may be even lower prices and heavier trading volume in our future. That means FSI is not near recovery and could even trade to lower levels. Then there is that promised announcement at the end of March 2016, when Flexible Solutions provides all the details of its troubles last year.
We also expect management to finally provide guidance on how sales have been trending in the first months of the year. Disappointing guidance could leave FSI trading more like an option on recovery rather than the value of future cash flows. That might be even more interesting for investors who like owning an environmentally sound specialty chemical company like Flexible Solutions.
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.