A Closer Look at FutureFuel

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

After deciding that working at any place called FutureFuel (NYSE: FF) would be awesome, I further decided that an alternative fuel company with a dividend, cash, and low debt deserved my closer attention. In a prior piece, I went over all the metrics that I think made the company interesting. I prefer not to rehash them, because I want to focus more on the future growth and focus of the company, as well as a bit more about the industry and their place in it.

Insider buying points to solid future

There are a bunch of headlines referring to insider buying for FutureFuel, but all of them focus on the most recent purchase by an officer of a little less than 5,000 shares in the mid-$11 range. I decided to look into the insider transactions further back, and ignored the list that consisted of institutional owners. There have been a few insider purchases in the last six months. The majority are options exercises, but there is no sale of those as of yet. There are also a few straight purchases. Most of them were in the last three months of 2012, when the price was lower than it is now. With the solid dividend the company has, those purchases have already returned a nice sum.

Insider buying is a good sign for a company. I find the line between insider trading and legitimate buying fuzzy. Though officers may not be acting on concrete information that is not available to the public, their insider perspective gives them an advantage when they look at the information. For example, they have a better idea of what news to weight more, or to see the truth behind purposefully vague or ambiguous statements. They may know the intangible difference between "believe" and "strongly believe" when it comes to some future projection the company is making.

In the case of FutureFuel, it seems the insiders believe that the dividend and/or capital appreciation of the stock will continue in the future. This is probably due to improving conditions in the marketplace, as well as FutureFuel's own strengths. If you are considering a long position, it is nice to see that insiders have judged the future the same.

Cash and debt deserve special attention

Producing fuel to sell requires a lot of expensive equipment. Also, FutureFuel's other business in chemicals requires expensive equipment as well. The company's high cash, and low debt is a pretty good sign considering the industry it is in. The company is in business, and is making a profit.

The chemical sector probably helps paper over the fluctuations inherent to the biofuels sector. Chemical production is not much easier than biofuel production. Look at DuPont (NYSE: DD) with its gigantic market cap of about $46 billion, and massive TTM net income of $2.78 billion. It still has a debt-to-equity ratio above 1. DuPont has a dividend yield that is comparable to FutureFuel, but who wants big and safe? FutureFuel can have a lot of growth ahead of it.

It also has the diversity of being in two businesses. DuPont does not have low debt and half its market cap in cash, though it does have over $4B in its hoard. When choosing stocks, I prefer the "less is more strategy." Smaller companies offer the greatest opportunities for growth, but stay away from hot and bloated growth stocks.

Closer to FutureFuel's world, Green Plains Renewable Energy (NASDAQ: GPRE) has its entire market cap in cash with $280M in cash, but is burdened with a debt-to-equity ratio of 1.3. Green Plains is a popular stock when it comes to biofuels, as a producer of ethanol for blending, it has a government mandated market. It might not be enough if supply pushes prices down, though. The company operates on paper-thin margins, with gross and net below 5%. Green Plains was just upgraded, and it beat estimates. The debt level makes me concerned however. Also, I think FutureFuel's biodiesel will be a safer long-term fuel than ethanol for blending, due to ethanol's lower energy capacity.

Dividend suggests commitment to profitability

Alternative fuel companies generally have a ton of debt, and the industry is tricky enough that coming by a profit consistently is difficult. FutureFuel has almost half its market cap in cash, and has a dividend yield around 3.5%. No company would offer a regular dividend, let alone one that high, unless there is reason to believe that profitability will continue.

I do wonder whether FutureFuel will increase the dividend in the future. There are no earnings call transcripts for me to read, so I will have to wait for the next live call to get more of a sense for the company. I want to know a bit more about its operations and why it offers a dividend, when it does not seem like any other similarly-sized company in its industry does.

Final thoughts

I took a look at Renewable Energy Group, but decided that I still felt it was headed toward posting losses, and therefore demurred on deeper analysis. It highlights the tricky nature of the biofuels industry. When these companies have profit for a few quarters, people are looking at signs of consistency that eludes green technology in general. That is why I like FutureFuel with its dividend. It has committed to maintaining profitability.

The diversity of having chemicals and biodiesel offers it more flexibility. Biodiesel will be a growing market as traditional fossil fuels get expensive, but in the near-term the low price of natural gas is likely to hurt many biofuels producers. The dividend makes FutureFuel a solid choice to go long. It does require constant attention though. If profitability becomes an issue, then the dividend would disappear. In that case, I am less of a fan.


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