FF - FutureFuel: Q1 Trends Point To More Potential Stock Price Gains

2023-05-19 16:27:48 ET

Summary

• Sales and adjusted EBITDA increased significantly in Q1.
• Both the chemical and biofuel segments saw gross margins rise significantly in the quarter.
• Book value continues to grow, and the valuation remains attractive from a historic standpoint.

Intro

We wrote about FutureFuel Corp. ( FF ) back in February of this year when we stated that the payment of another blowout special dividend was a likely possibility. Shares have returned roughly 5.5% since then when we incorporate FutureFuel's quarterly dividend payments, where we have seen an aggressive move up in recent sessions. The company at the time certainly had the cash to afford the special dividend ($200+ million cash balance) as cash-flow generation came in very strong in the company's fiscal third quarter last year. In fact, due to the generation of approximately $46 million of operating cash flow in that quarter, FutureFuel's cash balance (including short-term investments) spiked to $210 million, which is a number that easily would have covered a $3+ per share one-off payment to shareholders at the time.

However, if we fast-forward a couple of earnings reports and specifically FutureFuel's recent first-quarter earnings numbers, we see that management has used a sizable portion of its cash to beef up its inventory position. If this trend continues, there will obviously be fewer funds to pay out a sizable special dividend over time. In saying this, Future Fuel remains a buy in our opinion for the following reasons.

Firstly, if we pull up a long-term chart, we see that the shares of FutureFuel have been making higher highs and higher lows for many years now. Furthermore, during this timeframe, the long-term MACD technical indicator has provided a solid read on the share-price direction. This indicator (Which is a solid read on FutureFuel's long-term trend & momentum) gave buying signals (through crossovers) in 2016 as well as 2020. Both crossovers resulted in strong rallies to the upside, which means our late 2022 signal (considering it is the most oversold of the three crossovers) could indeed follow the same course in the months to come. Suffice it to say, as we stand today, the pattern of higher highs and higher lows has more possibilities of continuing than reversing in the months ahead, in our view.

As chartists, we believe the technicals surmise what is happening within FutureFuel and its sector from a fundamental basis. In fact, and irrespective of FutureFuel's current financials, we believe that every known piece of information with respect to forward-looking supply/demand imbalances has already been embedded into the technical chart at this stage. This is why in this sector (which is very hard to predict in terms of volumes being sold), investors should continue to invest in what is in front of them (known fundamentals).

Value Proposition Intact

When companies have a keen valuation and strong profitability, it stacks the odds in favor of a rising share price over time. Regarding FutureFuel's near-term earnings history, a 75%+ increase in FutureFuel's sales in Q1 this year (primarily due to larger biofuel volumes and better pricing) drove adjusted EBITDA to $12.495 million for the quarter. Furthermore, gross profit grew significantly in both segments, with the chemical segment (59%+ increase in gross profit) benefiting from a better product mix and the biofuels segment rising from negative territory last year to $13 million in Q1 of this year. Suffice it to say, gross profit ($21.6 million in Q1) drives FutureFuel's profitability so as long as raw material & conversion costs do not rise significantly, we see the company's profitability remaining strong over the near term. In fact, based on GAAP earnings, FutureFuel's trailing price-to-earnings ratio comes in at 8.52 plus other key valuation metrics (With the exception of cash flow) remain cheaper than the company's 5-year averages.

Profitability

We calculate FutureFuel's return on capital by dividing the sum of the company's net-working capital and net fixed assets into the company's trailing 12-month operating profit ($45.4 million). By calculating ROC in the following way where we strip out FutureFuel's sizable cash balance and short-term investments, we really see the quality of FutureFuel's business by only focusing on the capital needed to run the business.

Therefore, we get ROC to be 45.4 / 55.2 + 76.9 = 34.37%.

Conclusion

Therefore, to sum up, shares of FutureFuel continue to make higher highs as strong revenue growth is materializing in strong return on capital rates for the company. Furthermore. Shares remain cheap from a historic standpoint, which is why we continue to see the long-term technical pattern continuing. We look forward to continued coverage.

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