Preview on Bio-profits

Biodiesel and biochemical producer FutureFuel Corporation (FF:  NYSE) is on the calendar to report fourth quarter 2015 financial results this week on March 10th after the market close.  A conference call is scheduled for the same afternoon.  The single published estimate for FutureFuel is for $0.28 in earnings per share on $122.5 million in total sales.  Despite an increase in this estimate in the last week, the number still represents a significant decrease in earnings compared to the prior-year period.  The Company has missed the consensus estimate in both of the last two quarters and we do not have particular confidence that this quarter will be a ‘beat.’ 

FutureFuel makes its living producing biodiesel and biochemicals, which represent the Company’s two reporting segments.  Many of the FutureFuel products are intermediate goods used in finishing consumer and industrial end goods.  FutureFuel chemicals end up in coatings, solvents, herbicides and nutrition products. The Company is known for its bleach activator, nonanoyloxybenzene-sulfate, which is used in household detergents. 

FutureFuel shares took a tumble a few months ago after one of its primary customers for the bleach activator, Proctor & Gamble, announced it would cut back orders.  Ultimately, the agreement with Proctor & Gamble was extended to 2018 with reductions in price and volumes.  The company has had to scramble to keep investors content that the near-term quarters can still deliver growth and profits. 

Historically, the Company has experienced erratic sales growth in part due to volatile commodity prices.  While sales and net income have varied year-to-year, FutureFuel is consistently profitable.  Operations generate cash every year, providing financial resources for future investments.  It is an attractive achievement for a participant in the renewable energy industry where most companies remain at developmental stage or have not yet reach sufficient scale to generate profits.

The pull back in price provided an entry point into FutureFuel’s shares.  Crystal Equity Research has a Technical Buy rating on FutureFuel.  The shares have been on a steady climb over the past three weeks, much as we expected in our initiation argument issued in late January 2016.  We observe a strong line of price resistance at the $14.00 price level that appears to have been established during historic trading as higher volumes at these prices suggest it is a trigger point for trader decisions. The stock stopped short of this level in trading last week.  The stock could drive up through this price if the quarter report shows strength.

A laundry list of technical indicators was used to select FF as a good stock for a long or bull case position.  Many of the same indicators are monitored daily or weekly to decide when to close out the position.  The stock appears overbought according to two of the favorites, the Relative Strength Index and the Commodity Channel Index.  However, we do not believe that all demand for FF has been satisfied.  The Moving Average Convergence Divergence (MACD) Line is still headed higher.  More importantly, the MACD histogram is continuing to increase.  The MACD histogram established a ‘higher’ high in trading last week, a circumstance that underscores the strength of the price movement higher.  

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.