One of the best-performing stocks in our All Investable Screener, which you can register for here, is FutureFuel Corp. (NYSE:FF).

FutureFuel Corp., through its subsidiaries, manufactures and sells diversified chemical products, bio-based products, and bio-based specialty chemical products in the United States and internationally. It operates in two segments, Chemicals and Biofuels.

Chemicals

The Chemicals segment manufactures and sells custom chemicals, including agrochemicals and intermediates, detergent additives, biocides intermediates, specialty polymers, dyes, stabilizers, and chemicals intermediates; and chemicals used in consumer products consisting of cosmetics and personal care products, specialty polymers, and specialty products used in the fuels industry.

Biofuels

The Biofuels segment produces and sells biodiesel. It also sells petrodiesel in blends; and engages in buying, selling, and shipping refined petroleum products on common carrier pipelines. This segment markets its biodiesel products directly to customers through railcars, tank trucks, and barges in the United States.

Overview

FutureFuel is a company that has continued to deliver a solid financial performance driven by improved operational execution in its biofuels business and supported by the improved regulatory environment of tax credits and incentives, while its custom chemicals business continues to encounter challenges related to contraction in energy and agricultural crop chemistry markets.

As you can see (below), FutureFuel’s share price has been hammered in the past 12 months, down 25% to $11.38 from a high of $15.23 in November last year. I believe the company’s stock has been oversold and still represents great value.

Solid Margins

A quick look at the income statement for the six months ending June 30, 2016 shows revenues have dropped 15%. However, take a look at the gross profit which has actually increased, due mainly to a significant reduction of 33% in the costs of goods sold.

This is a company that has managed to maintain gross margins around 19%, most of which has filtered through to operating margins around 16% for the past four years, despite the decrease in revenue. FutureFuel ending the six month period with $24.8 Million in net income.

Six months ended June 30, 2016
(Amounts in thousands)	2016		2015
Revenue	$	109,046	$	128,505
Revenues – related parties		5,468		30,180
Cost of goods sold		90,276		135,210
Cost of goods sold – related parties		3,435		2,807
Distribution		1,565		1,634
Distribution – related parties		213		176
Gross profit		19,025		18,858
Selling, general, and administrative expenses
Compensation expense		2,443		2,212
Other expense		1,163		1,181
Related party expense		89		126
Research and development expenses		1,425		1,385
		5,120		4,904
Income from operations		13,905		13,954
Interest and dividend income		2,809		2,672
Interest expense		(85)		(49)
Gain/(loss) on marketable securities		(405)		1,471
Other expense		(220)		(122)
		2,099		3,972
Income before income taxes		16,004		17,926
(Benefit)/provision for income taxes		(8,789)		6,002
Net income	$	24,793	$	11,924

Real Value on the Balance Sheet

The first thing you’ll notice (below), is that FutureFuel has $174 Million in cash. Also noticeable is that the company has marketable securities of $92 Million. When you add those two together, FutureFuel has $266 Million in cash and cash equivalents. Now, compare that to the company’s debt which is zero.

When you subtract the $266 Million in cash and cash equivalents from the company’s current market cap of $498 Million, that gives us an Enterprise Value of $232 Million.

Now, let’s take a look at the company’s Net Current Asset Value (NCAV). NCAV is defined as (current assets minus total liabilities). You’ll notice that FutureFuel has current assets totaling $369 Million and just $79.6 Million in total liabilities, or $289.48 Million in NCAV. When you divide that number by the number of shares that the company has outstanding (43.72 Million), that gives us a NCAV per share of $6.62, compared to the current share price of $11.38.

Finally, let’s take a look at the company’s Tangible Book Value (TBV). TBV is calculated as (Total Equity minus Preferred Stock minus Intangibles). In the case of FutureFuel, the company has Total Equity of $415.9 Million, no preferred stock and Intangibles totaling $1.4 Million.

In other words the company has a TBV of $414.5 Million or, $9.48 per share compared to the current share price of $11.38.

June 30, 2016 (Amounts in thousands)
Assets
Cash and cash equivalents	$	173,600
Accounts receivable		24,611
Accounts receivable – related parties		33
Inventory		58,717
Income tax receivable		16,932
Prepaid expenses		1,053
Prepaid expenses – related parties		35
Marketable securities		92,064
Deferred financing costs		144
Other current assets		1,892
Total current assets		369,081
Property, plant and equipment, net		121,012
Intangible assets		1,408
Deferred financing costs		397
Other assets		3,640
Total noncurrent assets		126,457
Total Assets	$	495,538
Liabilities and Stockholders’ Equity
Accounts payable	$	16,494
Accounts payable – related parties		1,828
Current deferred income tax liability		4,533
Deferred revenue – short-term		4,143
Contingent liability – short-term		1,151
Accrued expenses and other current liabilities		5,446
Total current liabilities		33,595
Deferred revenue – long-term		17,378
Other noncurrent liabilities		836
Noncurrent deferred income tax liability		27,790
Total noncurrent liabilities		46,004
Total liabilities		79,599

Loads of Free Cashflow

There’s more good news in the statement of cashflows (below).

While the company reported net income of $24.8 Million, the statement of cashflows shows $46 Million in operating cashflow from the six month period ending June 30, 2016. With capex of just $2.3 Milliion, that leaves free cashflow of $22.5 Million. You’ll also notice that while FutureFuel’s entire investing activities totaled $21 Million, the bulk of this was the net purchase and sale of marketable securities totaling ($15.7 Million).

This is a company that’s entirely funded by its operations. As you can see, FutureFuel did not take on any new debt or issue any new shares and had $25 Million in cashflow after investing, it paid dividends totaling $5.2 Million and stuck $19.5 Million in the bank. In fact, such is the ability for FutureFuel to generate cash that is has a 15% FCF/EV yield (TTM).

Six months ended June 30:
(Amounts in thousands)	2016
Cash flows provided by operating activities
Net income	$	24,793
Net cash provided by operating activities		46,028
Cash flows from investing activities
Collateralization of derivative instruments		(3,011)
Purchase of marketable securities		(32,299)
Proceeds from the sale of marketable securities		16,524
Expenditures for intangible assets		–
Capital expenditures		(2,254)
Net cash used in investing activities		(21,040)
Cash flows from financing activities
Minimum tax withholding on stock options exercised and awards vested		(55)
Excess tax benefits associated with stock options and awards		(136)
Deferred financing costs		–
Payment of dividends		(5,246)
Net cash used in financing activities		(5,437)
Net change in cash and cash equivalents		19,551
Cash and cash equivalents at beginning of period		154,049
Cash and cash equivalents at end of period	$	173,600

Valuation

As mentioned above, when you subtract the $266 Million in cash and cash equivalents from the company’s current market cap of $498 Million, that gives us an Enterprise Value of $232 Million, or 4.94 times operating earnings (TTM). The company is currently trading on a P/E of 7.86, a P/B of 1.2 and a P/S of 1.92.

FutureFuel is the type of company that provides lots of upsides. These include –

• Solid gross and operating margins
• A strong balance sheet
• Plenty of free cash flow
• No debt
• Loads of cash

And, it’s undervalued.

 

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