Small Chemical Companies: Growth or Dead Wood?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I like small companies for a couple of reasons. One, they tend to have a lot of room to grow. After all, Exxon isn't likely to double its $403 billion market cap. If it does I'd be shocked. I don't even believe Apple is going to double based on anything beyond hype, but I'll deal with that company in a future post. For now I'll deal with companies where doubling, tripling, quadrupling ... FutureFuel (NYSE: FF) could reasonably decatuple its $513.68 million market cap and still be only 1% of Apple's size. Maybe I don't see something or maybe I didn't drink the iKoolaid, but I see that being a long track to run on.
High Performance Machine
I like a lot about FutureFuel. It's small, it's hungry and it's efficient. Since October 2011 its earnings per share have jumped 35.9%, and its ability to pay its obligations is exceptional. The current ratio and quick ratio are marks of how well it could pay both short and long-term obligations based on liquid assets on hand, and FutureFuel has a current ratio of 7.31 and a quick ratio of 6.04. Keeping a lot of cash on hand "just in case" is something that Apple is also fond of doing. Maybe it's a functional strategy for being a solid company.
I also like that FutureFuel is pulling 10.6% profit margins despite the reductions in spending on biofuels. They've obviously found actual customers instead of relying on the government. The company is also trading at a decent deal, going for just 13.38 times earnings and 1.7 times book value. Do your own research and tell me if I've missed something terrible, but I think old FF might be a diamond sparkling quietly in the rough.
They Can Only Make Plastic So Strong
Plastic is the nectar of the gods. And A. Schulman (NASDAQ: SHLM) is a plastic compounding company that might have some potential. While I don't love the company's rather paltry 2.4% profit margins and I'm not sure if such a small company should be paying a dividend, Schulman makes plastics stronger and more effective at specialized applications.
Unfortunately, I see some problems for Schulman. Namely, they're not vertically integrated enough to escape two major pricing problems. When raw materials go up, Schulman has to pay more and can't necessarily charge more. The automobile industry in the US isn't exactly the most robust thing going, and they're the main customers this company has. So I don't see a doubling on the horizon unless Schulman drops US production, aligns itself with more efficient and profitable automakers (such as moving to India, China and/or Japan) and stops paying what I consider a pre-emptive dividend. But since they probably won't do those things, I'm not sold at this point.
Too Rich for My Blood
I like the diversification that Balchem (NASDAQ: BCPC) brings to the table. When I see "medical" and "food" in a company's profile, I see profitability because these are two basic human needs with extreme price elasticity. When a $1.1 billion company that pulls 13.2% profit margins works in this field, I get intrigued. I appreciate that Balchem is turning about 17.5% of its revenue into free cash, which is pretty efficient.
My only beef with the company is that Balchem is not cheap by my standards, trading at more than 17 times earnings and 4 times book value. Investors expect this company to grow hardcore, and investing in it now among all the speculative fervor would be showing up "fashionably late" when the hors d'oeuvres are all gone and the best drinks are long consumed. For now, I'll pass. If there's another big sell-off like there was in 2011, though, I'll take notice and see about grabbing a few shares.
Fly Me to the Moon
Huntsman (NYSE: HUN) barely qualifies as small at a nearly $4 billion market cap, and its $11 billion in annual revenues are anything but tiny or inconsequential. While I normally scoff at anything short of a 10% profit margin, 4.5% in this instance is nearly half a billion bucks in profit. That's nothing to sneeze at. While I normally like my dividends only in companies where the growth is small, I think that Huntsman's 2.5% dividend yield says nice things about its potential returns. But two things really catch my eye:
1. Huntsman is a global leader in epoxy powder coatings and electrical insulation, which are big in the construction industry. As this industry recovers worldwide, the company is likely to grow right alongside it. Huntsman is also big into aerospace composite materials, which makes it a major player with NASA, Virgin Galactic and whomever else wants to leave the earth behind. I'm all for interplanetary exposure (provided I've got on proper protective equipment, of course).
2. The company's a potentially good deal, trading at only 7.69 times earnings and 1.8 times its book value. When the Fool's rules allow it, I fully intend to grab some shares. I take a lot of flak for my lack of understanding in the comments I receive, but I'm pretty sure I can spot a decent deal. Of course, I'll keep digging for awhile to make sure there's nothing terrible hiding under the surface.
pongun has no position in any stocks mentioned. The Motley Fool recommends Balchem Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!