Alternative Fuels for a Fancy, Green Future

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The world of the future is green with gardens on buildings and crystal clear streams all of the place and running off buildings. Everything is pure white or chrome. This is not the future I signed up for in 2012. We'll have to take it one-step at a time, and biofuels are one of those steps that will carry the world into the future. Green technology gets a bad reputation, as being expensive and inefficient. Some of that criticism is deserved, but some green technology solutions like grid storage and biofuels deserve attention for other reasons. Difficulty of finding and extracting more fossil fuels is the greatest argument in favor of biofuels. Environment aside, yanking goo from the earth and refining it will not last forever. Right now, I am list building, and plan on looking into interesting companies further. You can join me on my quest for knowledge, but analysis always starts with the basics. Sharing is caring.

1. FutureFuel

The name FutureFuel (NYSE: FF) elicits excitement. How cool would it to say to someone that you work for FutureFuel? I would design the coolest custom business cards. FutureFuels has two segments, chemicals and biofuels. A little bit of diversity never hurt. FutureFuels impresses me for its low debt-to-equity ratio of 0.0082. Companies that engage in the creation of biofuels usually have to invest in equipment and rack up the debt. Any sort of refining or fuel production operation involves expensive equipment, leading to high capital expenditures to put it in finance terms. The company is profitable and revenue growth has been strong. It only recently showed some weakness in revenue growth, but it is not excessive.

It is also very nice of the company to give a dividend yielding over 3%, while having almost $200M in cash available. Having almost two-fifths of the market cap in cash is good, because it allows the company to continue its dividend in case anything unexpected happens while giving it the flexibility of deploying cash for expansion instead of debt. Debt can be used later as profits increase. I always believe debt should be a last resort unless the interest rate is too good to pass up.

2. Green Plains Renewable Energy

I suppose you cannot have a list about alternative fuels without Green Plains Renewable Energy (NASDAQ: GPRE). The stock took one big tumble in 2012 and bottomed out in July. Since then the share price has been in beast mode having gone from below $4 to the current level below $10. Perhaps waiting for it to cool off would be a smart idea if GPRE is something you really want to invest in. That will come down to your own instincts. GPRE has more debt, which is in line with what I would expect from a company producing anything that starts with "bio." The debt-to-equity ratio is 1.352, probably due to the outlays made for production equipment.

GPRE engages in the production of ethanol for cars, and has a few other products. My view of ethanol in our gasoline is not entirely positive. It has a lower energy content per unit than gasoline and is corrosive. I question the impact it makes on environment overall. Still the US requires it and we have the corn, usually, to produce it.

The market cap is almost $300M, but its revenue is almost $3.5B. It seems the company is in growth mode with its extremely low profit margins. Even gross margin is hovering at less than 5%. It would be nicer to have it above 6% as it was in the past. GPRE is not a company to have large margins. It is in a volume business. Future fuels has higher margins with gross margins around 25% and net margin at 14%. Alternative energy is a broad term, so there is no need to compare the two head to head. GPRE is profitable, and despite its debt does have $280M in cash. This may be less than long-term debt, but it is healthy enough for a growth company. Not every growth company can have massive margins, and no debt.

3. Renewable Energy Group

These alternative fuel companies have names that are a little on the nose, and Renewable Energy Group (NASDAQ: REGI) is a great example of this. This company has the net income that I like to see. Off of a little over $1B in revenue the company made around $115M in net income, both measures are trailing twelve months. However, there were some abnormally high profit margins the last few quarters. The company is more adept at losing money than making it. It only has $88M in cash, but no long-term debt. Debt-to-equity is slightly above zero, but as I said no long-term debt. The company is heading back into the losing money area, and therefore warrants passing on this one for now. At least it trades below book, but that might just be because it deserves to. The stock has a 1.473 PE ratio, but a look at the whole picture makes it seem like a trick. Surely it is not on purpose, but a blip that lasts even a few quarters is not a trend. Lesson learned.

Concluding Thoughts

The fact that there is not a waterfall cascading over the windows I have next to me is a shame. The future is now, and yet it just looks like yesterday. We harvest the remains of long dead things and ignite them to make our cars run with tiny explosions. That the timing is precise in engines offers me no solace. All the while we are sending our environment back to the carboniferous period of lush greenery and gigantic insects, or some other horrible climate change issues. Alternative fuels may be a step to stopping environmental decay. For the U.S. it is an important step to self-sufficiency. FutureFuels deserves more qualitative analysis, and GPRE might be interesting to find a new growth stock. I hope to follow up on these two companies soon.


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